MNI POLICY: Kashkari: Fed Should Commit To Zero For Longer

Minneapolis Fed President Neel Kashkari said Friday he dissented against Wednesday's FOMC decision because policymakers should commit to holding interest rates near zero for even longer, for a year after core inflation first exceeds 2%.

The FOMC this week pledged to hold rates until the headline inflation rate is on track to rise moderately above 2% for some time. Kashkari endorsed the overall idea of a pledge following the introduction of a new long-term policy framework this year, but said Fed should learn from its experience in the 2015 tightening cycle when it underestimated the degree of slack in the labor market and put too much emphasis on complaints from business owners about worker shortages, he said in an essay posted on Medium.

"While I believe the statement is a positive step forward in putting those lessons into practice, I would have preferred the Committee make a stronger commitment to not raising rates until we were certain to have achieved our dual mandate objectives," he said.

"In recent years, we have repeatedly believed we were at or beyond maximum employment only to be surprised when many more Americans reentered the labor market or chose not to leave," he said, noting he also dissented to all three rate increases in 2017, a view now shared by more of his FOMC colleagues. "Even in January 2020, we had not yet reached maximum employment."

TRUE LIFTOFF

Narrowing the pledge to hold rates to core prices and removing a reference to a specific jobs target helps avoid underestimating job market slack, he said.

"We would only lift off once we had demonstrated that we really were at maximum employment, because core inflation would have had to actually hit or exceed 2 percent on a sustained basis in order to lift off. Policymakers will have a range of opinions about what constitutes a sustained basis, but for me in this environment, it means roughly a year," he said.

"Not raising rates for roughly a year after core inflation first crosses 2 percent is consistent with a strategy of aiming for a modest overshoot in order to achieve average inflation of 2 percent."

Robert Kaplan of the Dallas Fed also dissented, with the FOMC saying that was because he wanted greater flexibility after reaching the full employment and price goals. The Fed's dot plot showed no consensus for a rate increase through 2023.