Minn Fed's Kashkari: Ready to Move on Bal Sheet Despite Infl

By Karen Mracek

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

said Friday he supports beginning to normalize the Fed's balance sheet, but

wanted to see more progress on inflation before supporting another hike in the

fed funds rate.

     "I have been in favor of us slowly bringing that balance sheet down to a

more normal size even though I'm still concerned about inflation," Kashkari said

in a town hall style event at the Woodbury Area Chamber of Commerce in

Minnesota.

     Kashkari, a voter this year on the policymaking Federal Open Market

Committee, dissented from the two 25 basis point rate hikes this year, and said

the decision this week by the FOMC to hold rates steady was about "let's wait to

see more data" on inflation moving back towards the Fed's 2% target.

     Kashkari reconcile those two positions -- ready to move on the balance

sheet but not on rates -- because "I think the big, big balance sheet isn't

doing a lot to boost the economy right now." But, he added, "I do think there

are big costs in terms of public confidence in the Federal Reserve, because a

lot of people are concerned" about the size of the balance sheet.

     The Fed's portfolio of Treasuries and mortgage-backed securities grew

through three rounds of quantitative easing from around $800 billion before the

crisis to around $4.5 trillion today. "What I want to do is start shrinking that

balance sheet by letting it gradually roll off as the bonds mature," Kashkari

said, and then "have that happen in the background over the next several years."

     Meanwhile, he added, "we can focus on inflation with our short term

interest rate and get back to a normal policy environment."

     Kashkari said he understands the argument of some of his colleagues worried

about having to possibly raise rates faster than desired if inflation increases

more than expected. But with inflation "coming up below our inflation target,

coming up a little bit low year after year after year," Kashkari said, "Why

don't we wait until we see inflation start to move back towards our 2% target?"

     The job market "continues to be strong," he said, "but it's really curious.

We had expected to see wages growing more quickly. We had expected to see

inflation starting to climb."

     But while the job market's been strong, he said, "unfortunately wage growth

has not been very strong and there's been very little sign of inflation picking

up."

--MNI Washington Bureau;tel: +1 202 371-2121; email: karen.mracek@marketnews.com

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