As President Donald Trump questions whether the Federal Reserve is doing enough to keep the economy strong, the president of the Federal Reserve Bank of Minneapolis put forth one more idea this week to show the Fed is trying.
Neel Kashkari, who has been a proponent of keeping interest rates low since becoming a Fed executive in 2016, said in several venues this week that the Fed should not only cut interest rates but use one of the tools it did during the last recession in 2008 and 2009, when it had run out of room to cut short-term interest rates.
That tool, dubbed “forward guidance,” is a statement by the central bank’s rate-setting committee about its longer-term intentions for interest rates. In an appearance at the Minnesota State Fair Thursday and in an op-ed in the Financial Times earlier in the week, Kashkari said such statements from the Fed “can influence long-term bond rates by giving guidance about the future path of their short-term equivalents.”
The Fed tried several statements that were viewed as forward guidance during the 2008-2009 recession.
“Forward guidance was a new and untested tool during the financial crisis, so the Fed implemented it conservatively,” Kashkari wrote in the Financial Times. “Critics of these tools feared high inflation and a devalued currency, but such risks did not materialize.”
Avoid ‘the ditch’
If the rate-setting committee were to make such a statement today, Kashkari said he would recommend that it commit to not raising rates again until core inflation returns to 2%. That has been the panel’s stated target for years but inflation has not reached that level. That commitment also may have the effect of pushing inflation up, Kashkari said.
Low inflation is one reason why, when Kashkari had a vote on the rate panel in 2017, he voted against the three rate increases that happened that year.
Last month, when the rate-setting committee cut rates by a quarter-point, Kashkari sought a deeper cut of a half point.
Kashkari also has repeatedly said that the U.S. labor market is not as tight as some statistics suggest it is. He has looked for evidence of higher wage growth to support the notion that employment is near peak levels.
“If a recession is coming, we may end up with rates back at zero, but we should take action now to try to avoid the recession and the ditch,” Kashkari wrote.