Neel Kashkari, the Minneapolis Fed president who has been a vocal opponent of interest rate hikes, laid out new thinking on a key benchmark as he expressed support Friday for the central bank’s decision to hold rates in place, likely for the year.
Kashkari, who will get a vote on the Fed’s rate-setting committee again next year, said in a series of tweets that he needs more time to decide whether the current slowdown in jobs and economic growth — a key reason for the Fed’s pause — is “real or just a blip.”
More significantly, he said the dovishness he has long felt about rate hikes was shaped by a belief about a fundamental target called the neutral interest rate that may actually have be outdated.
The neutral interest rate is one that is high enough to contain inflation but low enough to avoid recession. He wrote that, when he opposed rate hikes in 2017 and 2018, he didn’t think any of them were high enough that they went past neutral and put the country at risk of recession.
“My view of neutral has been 2.5 percent nominal,” Kashkari wrote. “But that might not be right. Neutral might be lower than I thought.”
The central bank’s current key rate is a range of 2.25 percent to 2.5 percent on nominal basis.
With the statement, Kashkari appears to join a growing consensus among economists that the U.S. and other major economies are settling into a pattern of lower growth than in the past. And a lower-growth equilibrium suggests that the neutral interest rate should be lower than it has been in the past, when it was around 2 percent on an inflation-adjusted basis. Some economists are suggesting the new, inflation-adjusted neutral rate may be as low as 0.5 percent.
In his tweets, Kashkari said he is watching the difference in bond interest rates for clues about the neutral rate.
“The very flat yield curve (2-10) tells me we are likely close to neutral,” Kashkari wrote, referring to the difference in rates for 2-year and 10-year U.S. Treasuries. “But there is a lot of uncertainty around it and we might be contractionary (I hope not).”
The Fed’s rate-setters are mandated to consider job growth and inflation as they decide whether to raise or lower rates.
Broadly, U.S. economic growth by quarter peaked in the middle of last year, slowed in the second half and is forecast to have slowed even more during the first three months of this year. Meanwhile, the U.S. added only 20,000 jobs in February, the worst performance in years, and Minnesota lost 9,000, a downbeat number though in a measure that is routinely volatile.
Kashkari wrote that he believes there is still room for hiring in the job market and, as a result, no need to raise interest rates to try to slow the economy.
“Until we see wage growth net of productivity pick up and signal future inflation above 2 percent, I will continue to see slack in the labor market,” he wrote. “If inflation is close to or below target and there is still slack, no need to tap the brakes.”