MNI INTERVIEW: Kashkari: Hold Rates Until Prices Stick at 2%

--Labor Market Has More Slack, China Deal Stabilized Trade Risk

--Minneapolis Fed President Joined FOMC This Year

By Greg Quinn

     MINNEAPOLIS (MNI) - The Federal Reserve should commit to hold off from any

increase in interest rates until it is clear price gains are consistently on

target in an economy that still has labor market slack, Minneapolis Fed

President Neel Kashkari told MNI.

     "What we have done over the past five years is we've raised rates in

advance of inflation that we expected to come, but the inflation didn't come, so

those rate rises in fact ended up not having been necessary," he said in an

interview during a break in a regional economic conference.

     "I'm just simply saying let's wait until core inflation gets back to our

target on a sustained basis. We can always raise rates then," he said, calling

for the Fed to make this commitment clear in forward guidance.

     Kashkari, who became an FOMC voting member this year, remains "laser

focused" on the labor market, which is still churning out up to 200,000 jobs a

month years after early warnings the economy was reaching full employment.

     --LABOR MARKET SLACK

     "I continue to be focused on trying to understand how many more workers are

on the sidelines that could be brought in. What that means about the future path

of interest rates I don't know yet, I will need to see the data, and see how the

economy evolves."

     "I've been very consistent over the four years that I've been here that

I've seen slack in the labor market, and somebody (in the conference) asked the

question why isn't inflation rising? We can invent very complicated new theories

of economics or we can look at the most obvious explanation, that there is still

slack in the labor market."

     Companies are making a greater effort to find workers such as providing

transportation and providing on-the-job training, he said, calling this

"wonderful news for the country."

     But the dynamics in the job market and inflation justify a more patient

approach than applied over the past decade, he said, adding that the "most

beneficial thing" that could arise from the Fed's framework review this year

would be "to get out of our habit of raising rates ahead of inflation."

     "Even our existing framework, if we actually walked the walk of a symmetric

2% inflation target, that would be a substantial step forward," he said. "That

doesn't require a new framework, there are some benefits that you can debate

about a new framework. Even if we had lived the flexibility that our current

framework provides, we would be doing better."

     On the FOMC, Kashkari joins a group led by Chair Jerome Powell, who has

signaled an end to rate cuts unless there is a material change to prospects for

solid growth. The Fed cut three times in 2019 on weakness from the China-U.S.

trade war and Brexit and while those pressures have eased there is new turmoil

between the US and Iran.

     --FRACKING LIMITS OIL PRICE RISES

     The recent Phase One trade agreement with China has reduced risks of a

major trade shock, and the global economy may not face as much damage as in the

past from recent violence in the Middle East, he said.

     "We all need to see what the details are and hope we get to a fair trade,

long run outcome, but a pause is certainly better than an escalation," he said

of the China agreement.

     Referring to tensions between the U.S. and Iran, he noted that oil prices

are being capped by the capacity to increase U.S. production, he said. "That's a

profound economic benefit to the global economy, to be less vulnerable to these

types of geopolitical shocks."

     Kashkari cited prior attacks on Saudi oil sites that showed less volatile

oil prices. "So when Saudi Arabia's refineries got hit with a terrorist attack a

few months ago, I would have guessed 10 years ago that the price of oil would

have gone up by 15%. It barely budged, and then it came back down because of the

ability for frackers to tap new wells, to bring new supply on line."

     Kashkari has led the Minneapolis Fed since 2016 and started his career as

an aerospace engineer before moving to Goldman Sachs, the Treasury Department

and PIMCO. At Treasury he oversaw the TARP bailout program.

--MNI Ottawa Bureau; +1 613-314-9647; email: greg.quinn@marketnews.com

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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