Trial now

Jens Weidmann Succession at the Bundesbank?


Review $24B 20Y-Bond Auction Re-Open, Large Tail


Correction Still In Play


20Y WI Update

MNI INTERVIEW2: Kashkari Sees 'Neutral' Policy Being Restored

MNI (Ottawa)

Minneapolis Fed President cautions neutral rates and balance sheet settings have altered over time.

Sign up now for free access to this content.

Please enter your details below and select your areas of interest.

Minneapolis Fed President Neel Kashkari told MNI Friday the Federal Reserve should be able to restore normal interest rates and balance sheet assets in this cycle, but shifts in the economy's foundations mean normalcy won't quite look the same as before the pandemic struck.

While the Fed can unwind assets it bought under quantitative easing, Kashkari said the proper size of balance sheet will grow over time along with demand for U.S. dollars from the global economy and the banking system.

"Both of those reasons suggest that the balance sheet is not going to go back to exactly where it was before the pandemic hit because the underlying fundamentals just require a larger balance sheet," he said in a phone interview. "So, can we get back to that underlying trend, yes I absolutely believe so."

"The QE portion of the balance sheet is that portion that is beyond what is required for basic market functioning. So, can we unwind the QE portion? I absolutely believe we can and we will just as we did last time," he said. The Fed's balance sheet is currently USD8.5 trillion.

Kashkari also told MNI he agrees with the timeframe Fed Chair Jerome Powell laid out suggesting QE tapering could begin this year and wind up around the middle of 2022, and the Minneapolis Fed chief is more comfortable showing patience with rates he says should remain on hold into 2024. While Kashkari didn't specify where neutral rates may end up, he said the trend has clearly been downwards.


"Can we get back to neutral and can we get something above neutral? I'm confident that we will, we can and we will, but is that going to be lower than what people thought neutral was 20 or 30 years ago? Yes, probably," he said. "Unless something fundamentally changes in the economy, it seems like we're going to be a low interest rate environment for the foreseeable future."

Today's inflation pressures are also likely to subside as some high profile snarls in producing goods such as lumber and autos are worked out, he said.

"I do believe that they are transitory, related to the re-opening of the global economy and global supply chains in many cases that are getting stretched and taxed," he said. "I don't anticipate car prices continuing to climb and high levels, year after year after year."

The Fed is paying close attention to inflation expectations "and we will respond to make sure that inflation expectations remain anchored," Kashkari said.

Other trends around labor supply such as scaling back household checks, schools re-opening or workers afraid of returning to work amid the Delta variant remain important, he said. "It wouldn't surprise me if this is a rocky period going forward until we get the Delta variant better under control and people can feel more confident to go back to work and kind of go back to normal."


For the overall economy, "even with the Delta variant very being quite widespread, but with highly effective vaccines being available, my expectation is that we would not take a major step back," he said.

While the pandemic has boosted the prominence of digital purchases, Kashkari remains a skeptic on whether a new central bank digital currency can provide clear benefits. "I am still waiting for somebody to articulate what is it that this new central bank digital currency would actually deliver that is not available today, that is actually better for consumers and better for the government," he said.

Finally, Kashkari said the Fed's goal of a more inclusive job recovery should help some job seekers who had previously been overlooked find work. He has also called for education reforms to help marginalized groups, and when asked about his comfort speaking about race he said he learned a lot by looking back in American history. That view is evidenced in a Twitter profile with a banner photo of Abraham Lincoln listening to his generals.

"The more American history that I read, the more I understand how we got where we are," he said. "Be open to looking at the same situation and realizing, wow, I looked at it 180 degrees differently two years ago."