The reason to invite Neel Kashkari of the Federal Reserve Bank of Minneapolis to a conversation at the Star Tribune’s booth at the State Fair was to give fairgoers a glimpse into the thinking of a very influential government official, not to grill him on monetary policy.
For somebody as accomplished in public life as Kashkari, this interview must have seemed like batting practice. The only moment of any real tension came when Kashkari gently objected to hearing American interest rates characterized as “super low.”
Admittedly, super low is a very sloppy finance term. But my point was that interest rates have declined by a lot this year already, with such key rates as the 30-year Treasury bond yield never lower. Kashkari’s point is that interest rates can still decline from here, particularly short-term rates. In fact, he thinks they should.
Why that is says a lot about the economic environment we are in as well as the role of the Federal Reserve, easily one of the most effective government institutions we have.
Lots of talk about low interest rates likely going even lower, by the way, does not mean economic storm clouds must be gathering. The economic outlook isn’t as sunny as it was, with business investment slowing, but American consumers still feel pretty chipper.
The Fed made headlines this summer, at least for one whole news cycle, by dropping its target for short-term rates a quarter of a point, ending a cycle of increasing interest rates that began in 2015.
Its key rate is called the federal funds rate, basically interest on a one-day loan. If bankers guess wrong on Tuesday, they get another shot on Wednesday. One reason so few of us could probably correctly name the federal funds rate this week (the effective rate was a little over 2%) is because it’s of no practical use to most of us.
A far bigger story is what’s happened with the U.S. Treasury’s 10-year note, which is closely correlated to things we do care about, such as rates for home mortgages. If you haven’t been paying attention, growing concerns about the health of the global economy took the 10-year rate from a high last November of about 3.25% to less than 1.5% this week.
That big decline wasn’t the Federal Reserve’s doing.
Yet, here’s one way Kashkari’s objection to “super low” turns out to be a fair point: German, Dutch and Swiss government 10-year bonds are among those around the world that now return less than zero.
Lend the German government money, and at the end of the term you not only haven’t gotten any interest, you don’t even get back all the principal you put in.
In business it always pays to be deeply suspicious of any talk of “this time it’s different” or “a new normal,” but as Kashkari described it, the American population is growing more slowly, and as a result economic growth will likely be slower than it has been in the past.
That means interest rates are likely to remain lower than we had once been accustomed to.
“Japan has faced this for 20 years, because their population is growing even more slowly than ours is, and culturally they are very resistant to immigration,” he said at the fair. “And they’ve basically been at zero interest rates for the better part of 20 years.”
Even with longer-term interest rates declining, it still makes sense to advocates like Kashkari for the Fed to cut its favorite short-term interest rate. When the Fed did so at its committee meeting last month, Kashkari was in the room arguing for an even bigger cut, although he didn’t get credit for that in the official minutes.
He talked about some of this at the fair, a remarkably consistent argument he has made since he got the Minneapolis Fed president’s job in early 2016. The Fed has a job, handed to it by Congress more than 40 years ago, to foster conditions that get as many people working as possible and keep prices stable.
The rate of inflation has been consistently low, with little evidence of wage inflation. And even though the unemployment rate has drifted down to levels last seen in the 1960s, every month it seems there are people coming back into the job market. So how can we be at maximum employment?
Kashkari noted that he frequently hears from employers in our region about how hard it is to find workers. But until employers have really tried raising wage rates to fill their openings, this sounds to him like whining. Higher wages might bring more people into the job market, suggesting that employment still hasn’t hit its target.
And this is one of the remarkable things about the Fed. What other part of our government is really focused on making sure people can get a job? The Fed has limited policy tools, too, and can’t wade into such debates as those over tax policy or trade.
Kashkari has often been in the minority at the Fed, where people look at the same data but reach different conclusions about cutting short-term interest rates. But that’s not to suggest that his colleagues aren’t as interested in these same goals.
And even though the economy is far from a crisis, Kashkari has lately started to argue for another idea to stimulate economic growth that was one feature of the Fed’s response to the terrifying financial crisis of 2008. It’s called forward guidance, a wonky idea even among folks who follow Federal Reserve monetary policy for a living.
Basically, all it means is that the Fed openly commits to its plan. In this context that is not only keeping interest rates low, it’s hoping to stimulate businesses and consumers to invest more by publicly committing to keeping them low until the Fed’s target rate of inflation is finally reached. That could take a while.
“I’m trying to change the conversation,” Kashkari said of championing this crisis-era idea. “We ought to consider using at least this one other tool before rates get back down to zero. And maybe we can avoid getting back down to zero.”