Immigration plays a key role in economic growth, Kashkari says

Immigrants are vital to the nation's economic prosperity, the head of the Minneapolis Fed said Thursday, and the ultratight job market may help change the public debate over new restrictions on legal immigration.

The U.S. House of Representatives delayed a vote on an immigration bill after President Donald Trump tweeted that it would likely fail in the Senate. The measure has made headlines because it would call to beef up border security as Trump has sought while preventing children of illegal immigrants, informally known as Dreamers, from deportation.

But it would also cut overall legal immigration at a time when unemployment is near the ultralow levels last seen in the 1960s and the U.S. population is growing at its slowest rate since the 1930s.

The American economy can only grow by adding more people to the workforce or getting more productivity out of existing workers, Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, said in a roundtable event at the African Development Center in Minneapolis.

"This is just math. We can have slow growth, spend a lot of money to subsidize fertility or embrace immigration," Kashkari said. "If we want a high-growth U.S. economy, and I do, immigration is going to have to be an important part of that."

Kashkari, who served as a Treasury official in the George W. Bush administration and was a Republican candidate for governor in California, has been one of the rare voices on the right in recent months to argue that immigration ought to be maintained at existing levels or raised.

After some recent visits to congressional offices, Kashkari said he was surprised how many Republicans asked for help making the economic argument on immigration. "They look at their district and see that they need workers," he said. "So I think the overall state of the economy is going to help that argument rise to the top."

"It may well be that the tech community doesn't really care about farmworkers and that farmers don't really care about engineers," Kashkari said. "But they have all been talking about it for awhile."

In an opinion article for the Wall Street Journal earlier this year, Kashkari noted that the researchers at the Minneapolis Fed estimated the U.S. economy would grow by at least a half-percentage point a year if Congress and the Trump administration raised legal immigration by 1 million people a year — a sizable boost from today's levels.

In his discussion at the African Development Center, Kashkari said the U.S. historically has done well in accepting and integrating immigrants. But in the current political environment, shaped by Trump's antipathy toward immigration and uncertainty surrounding a solution, the economic benefits that immigrants have long provided is being overshadowed.

"It's human nature. People feel comfortable with their own, but I think we need to get past that," Kashkari said. "Having gotten past that in our history has served this country extraordinarily well."

Nasibu Sareva, executive director of the African Development Center, said his agency has helped dozens of immigrants start businesses over the past decade. In addition to Minneapolis, the center has offices in Rochester and Willmar and is exploring St. Cloud for a location.

Separately, Kashkari said that he thinks the Federal Reserve committee that sets interest rates — he is a nonvoting member in 2018 — should be moving to a neutral stance. The committee, which last week raised interest rates for a second time this year, has nearly reached its dual mandate of promoting full employment and getting inflation to a target rate of 2 percent.

Kashkari said he's keeping an eye on bond market reaction, particularly rates for 10-year U.S. securities, which should be rising at a time of full employment and higher bank rates. The 10-year rate has risen slightly recently but not as much as short-term bond rates. The two-year rate is now around 2.5 percent and the 10-year is around 2.9 percent. The difference between them is the smallest since 2007; on a graph, the curve they form is the flattest than since then, too.

Kashkari said that if the Fed lifts short-term bank rates higher, the bond market may push short-term bond rates higher than long-term ones, creating an inverted rate curve that economists view to be a signal of recession.

"Why would we do that if we're not actually seeing wage growth picking up much, if we're not seeing inflation?" he asked. "I'm comfortable about where we are, but I'm nervous about the path ahead because I want to see more evidence that the economy can handle higher interest rates."