Join NexChange - the professional
network for the financial services
industry - and receive a free one-
year subscription to Forbes
Neel Kashkari Elaborates on Why He Voted Against Raising Rates
While the U.S. economy is nearing full employment – which Kashkari acknowledges would by itself be enough to raise rates – core inflation is also dropping. “We don’t yet know if that drop in core inflation is transitory,” Kashkari writes. “In short, the economy is sending mixed signals: a tight labor market and weakening inflation.”
He further explains:
For me, deciding whether to raise rates or hold steady came down to a tension between faith and data.
On one hand, intuitively, I am inclined to believe in the logic of the Phillips curve: A tight labor market should lead to competition for workers, which should lead to higher wages. Eventually, firms will have to pass some of those costs on to their customers, which should lead to higher inflation. That makes intuitive sense. That’s the faith part.
On the other hand, unfortunately, the data aren’t supporting this story, with the FOMC coming up short on its inflation target for many years in a row, and now with core inflation actually falling even as the labor market is tightening. If we base our outlook for inflation on these actual data, we shouldn’t have raised rates this week. Instead, we should have waited to see if the recent drop in inflation is transitory to ensure that we are fulfilling our inflation mandate.
When I’m torn between faith and data, I look at decisions from a risk management perspective.
The risk of raising rates too soon is a continuation of the FOMC’s track record of coming up short of our inflation objective. As this Atlanta Fed survey recently indicated, many people already believe that our 2 percent inflation goal is a ceiling rather than a symmetric target. Raising rates will just further strengthen that belief. And if inflation expectations drop, as we’ve seen in some other countries (and there are signs it might be happening here in the United States), it can be very challenging to bring them back up.
The risk of not moving soon enough generally doesn’t appear to be large. If inflation does start to climb, that will actually be welcome. We will move toward our target, and I believe the FOMC will respond appropriately. And if it leads to a moderate overshoot of 2 percent, that shouldn’t be concerning since we say we have a symmetric target and not a ceiling.
You can read Kashkarian’s full essay here.