Neel Kashkari, president and CEO of the Federal Reserve Bank of Minneapolis, during an interview in New York on November 7, 2023.
Victor J. Azul | Bloomberg | fake images
Interest rates at their highest levels in about 23 years are not hurting the economy and could give policymakers more time before deciding whether to make cuts, the Federal Reserve chair said Monday. Minneapolis, Neel Kashkari.
In an essay posted on the central bank’s website, Kashkari said economic developments have shown that the Federal Reserve’s policy is not as restrictive of growth as it appears on the surface.
That means the long-term “neutral” rate, or the level that is neither restrictive nor stimulative, is likely higher than before the Covid-19 pandemic.
In essence, what would appear to be restrictive monetary policy judging by the history of the last 15 years no longer appears so, meaning nominal rates could stay higher for longer without harming the economy.
“This constellation of data suggests to me that the current monetary policy stance…may not be as tight as we would have assumed given the low neutral rate environment that existed before the pandemic,” Kashkari wrote.
The implications are significant as the Fed contemplates when to start, how much it should cut, and how quickly it should do so to return to neutral. Markets have been betting on an aggressive bearish move, but recent statements from central bank officials indicate there is no need to rush.
“It is possible, at least during the post-pandemic recovery period, that the policy stance representing neutral has increased,” wrote Kashkari, a non-voting member of the Federal Open Market Committee that sets rates this year. “The implication of this is that, I think, it gives the FOMC time to evaluate upcoming economic data before starting to lower the federal funds rate, with less risk that overly tight policy will derail the economic recovery.”
Kashkari’s comments mirror those of Federal Reserve Chairman Jerome Powell in recent days.
During his post-meeting news conference last Wednesday and in an interview aired Sunday night with CBS’ “60 Minutes,” Powell said a March cut is unlikely and agreed with the December projection of the FOMC of three quarter percentage point cuts this year.
More specifically on Kashkari’s argument, Powell noted that the negative effects he feared from the series of rate hikes the Federal Reserve implemented have not come to pass. The Federal Reserve raised its benchmark overnight interest rate 11 times by a value of 5.25 percentage points in a tightening cycle that extended from March 2022 to July 2023.
“”It hasn’t really happened. The economy has continued to grow strongly. Job creation has been high,” he said on “60 Minutes.” “So really the kind of pain that I was worried about and so many others, we haven’t had.”
Despite widespread expectations of a recession, the U.S. economy, as measured by gross domestic product, grew at an annualized rate of 2.5% in 2023. Payroll growth has remained strong, while inflation measures They have relaxed.
Kashkari pointed to a variety of such data to show that the Fed’s hikes have not derailed growth, leading him to conclude that the neutral rate is likely higher than the roughly 0.5% that Fed officials they generally estimate.
There is no official “neutral rate” and officials often emphasize that it can only be estimated and never observed. Some policymakers like to use the federal funds rate minus inflation as neutral. Kashkari prefers 10-year TIPS performance, which is now around 1.82%. He notes that it has increased since last year, but only modestly.
At the same time, business investment and big-ticket purchases have increased, while housing numbers have at least moderated.
“This data leads me to wonder how much downward pressure monetary policy is currently putting on demand,” Kashkari said.
He noted that the data is not “unequivocally positive” and that he will be watching things like loan and credit card delinquencies for evidence of economic stress.
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