Kashkari urges a pause in rate hikes to study jobs picture

Neel Kashkari — the Minneapolis Fed president who for two years has been a vocal skeptic of interest-rate hikes — again on Friday urged a pause to them, commenting at a time when President Donald Trump has become increasingly critical of the central bank's rate moves.

Kashkari did not mention Trump in an essay published in the Wall Street Journal. Instead, he focused on challenging the key reason supporters think higher rates are needed — to combat rising inflation.

Eight hikes in the last three years have taken the federal funds rate from zero to a range of 2 to 2.25 percent. As a result, Kashkari said interest rates have reached a neutral impact that is "neither stimulating nor restricting the economy."

Another hike before the end of the year, as the Fed has indicated is likely, could tip that balance toward restriction, he said.

"Prematurely tapping the brakes could restrain wage growth and keep many Americans from participating in the economic recovery," Kashkari wrote.

The Fed's policymaking Open Market Committee considers two conditions when setting interest rates: inflation and U.S. employment. Inflation in the U.S. had been below the Fed's target rate of 2 percent for years, but it surpassed that benchmark in September 2017 and has hovered around it since then. Last month, the U.S. inflation rate was 2.3 percent.

Kashkari noted that the committee views the target as "symmetric" rather than hard, meaning that it should tolerate some inflation that's higher than 2 percent and not automatically use higher rates to try to slow it.

By slowing the expected pace of rate hikes, Kashkari wrote the Fed can take a deeper look at the U.S. employment picture. He suspects, despite getting to an unemployment rate of 3.7 percent, that the labor pool has not reached its full potential.

"For the past few years, policymakers have repeatedly thought the U.S. was at full employment, only to be surprised as Americans continued to enter the labor force in large numbers," Kashkari wrote.

As a leader of one of the Fed's 12 regional banks, Kashkari sits on the Open Market Committee and participates in the meetings where rates are set. Voting rights on such decisions rotate among the regional presidents. Kashkari held a vote in 2017 and opposed each of the three hikes that occurred that year. He will have the right to vote again in 2020.

Trump, in the face of slowing economic growth and declining exports, in July first publicly criticized Fed Chairman Jerome Powell over the committee's plan for three or four rate hikes this year. At rallies among political supporters this month, Trump has more frequently criticized the Fed, calling it "my biggest threat" and "crazy."

In an interview earlier this week with Wall Street Journal reporters, Trump said: "To me, the Fed is the biggest risk because I think that — I think interest rates are being raised too quickly. I think, to me, the biggest risk is the Fed, because my trade deals are great deals."