Caught between faith in an economic maxim and data showing it’s not working, Minneapolis Fed President Neel Kashkari said Friday he leaned toward data in voting earlier this week to leave interest rates steady.
Kashkari, for the second time this year, on Wednesday was the only member of the Fed’s rate-setting Open Market Committee to vote to hold rates in place. And, as after previous committee meetings, he published an explanation of his decision a couple of days afterward.
In it, Kashkari focused heavily on a contradiction that has been developing in the U.S. economy this year: The rate of inflation, which should be going up at a moment of near-maximum employment, has been going down instead.
He described that as “a tension between faith and data” and said that, on the inflation data alone, the Fed shouldn’t have raised rates. He added, “When I’m torn between faith and data, I look at decisions from a risk management perspective.”
By that analysis too, he said, the risk of raising rates too soon was greater than waiting. “The risk of not moving soon generally doesn’t appear to be large,” Kashkari wrote.
One of the risks of moving too soon, he said, was that consumers and investors will come to believe that the 2 percent inflation target Fed policymakers use is a ceiling rather than a goal. On Wednesday, the day the policymakers voted, the Labor Department reported that consumer prices fell last month and that core inflation, which excludes food and energy prices, fell to 1.7 percent from 1.9 percent a month earlier.
“We should have waited to see if the recent drop in inflation is transitory and if inflation is actually moving toward our 2 percent target,” Kashkari wrote.
Much of his essay revisited an analysis template that he first published in February, looking at measures of inflation, expectations about inflation, labor costs, unemployment and labor participation. There’s been little change in those indicators in recent months, though Kashkari noted that jobs data suggests the U.S. is closer to maximum employment.
He noted that his previous published analyses did not account for the optimistic views that some economists and investors had about the government budget and regulatory actions after the election of President Donald Trump. “Markets seem less optimistic than they were a few months ago about those future actions,” he wrote Friday. “Until we know more from Congress and the White House, I believe it is prudent to assume no change in the fiscal outlook.”
Along with its rate hike on Wednesday, the Open Market Committee also unveiled plans to normalize its balance sheet, which ballooned in size as it bought securities from 2009 to 2014. The Fed will stop reinvesting in ever-larger amounts of maturing securities, but it did not specify the overall size of the reduction or the precise timing.
Kashkari called that an “important, positive step” but said he would have liked the committee to announce a starting date. “This would give markets as much advanced notice as possible so that when the roll-off actually begins, it is as close to a nonevent as possible,” he wrote.