Fed's Kashkari: Premature Hikes Costing Wage Growth, Infl

--Should Focus on Bringing People Back to Labor Market Until Infl Climbs

--May Be A Lot More Slack in Labor Market Than Fed Sees

By Jean Yung

     WASHINGTON (MNI) - Federal Reserve Bank of Minneapolis President Neel

Kashkari said Tuesday the central bank may be overestimating the tightness of

the labor market and allowing inflation expectations to drift lower by treating

its 2% inflation target as a ceiling. 

     "Until we see inflation start climbing back towards target, we might as

well bring as many people back to the job market as possible" by leaving

interest rates where they are, Kashkari said at a forum at the University of

Minnesota. 

     "We're coming up short on our inflation mandate, there still seems to be

slack in the labor market, wage growth is not high. Why are we raising rates?"

he said. 

     Kashkari, a policy dove who has voted against both rate hikes so far this

year on the Federal Open Market Committee, even went as far as to suggest the

current weakness in inflation that has puzzled officials may be the Fed's

"premature hikes" taking effect with a lag. 

     "About 18 months ago, the Federal Reserve started hiking interest rates.

Maybe we shouldn't be surprised that now inflation is coming in low, that now

job growth seems to be slowing," he said. 

     "Maybe monetary policy is working exactly as we think it should. Maybe our

rate hikes are actually doing real harm to the economy. It's very possible our

rate hikes over the past 18 months are leading to slower job growth, leaving

more people on the sidelines, leading to lower wage growth and leading to lower

inflation and inflation expectations." 

     Even as the headline unemployment rate has fallen to 4.4% from 10% at the

height of the recession, wage growth has been sluggish, Kashkari said, positing

that the Fed might be making "two fundamental mistakes." 

     "We might be overestimating how tight the labor market is. There might be

more slack than is apparent in these headline unemployment numbers," he said,

citing the labor market participation rate of prime age people, which is still

"two years away" from pre-crisis levels. 

     Secondly, by treating the Fed's inflation target as a ceiling, as Kashkari

said he feels some colleagues do sometimes, "We at the Fed may have allowed

inflation expectations to drift lower," he said. 

     "Both of those -- if those really happened -- could explain the low wage

growth, the low inflation and the seemingly tight labor market," Kashkari said. 

     "These premature hikes that we've been embarking on, they're not free and i

think we need to remind ourselves of that." 

--MNI Washington Bureau; +1 202-371-2121; email: jean.yung@marketnews.com

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