In keeping with his image of a youthful, media-savvy Federal Reserve bank president, the Minneapolis Fed’s Neel Kashkari took to Medium Tuesday to discuss his reasoning for keeping interest rates on hold, as the central bank unanimously chose to do last week.
His argument was fairly straight forward: Why tighten monetary conditions when inflation remains below the Fed’s target, inflation expectations are subdued, and the job market is probably still not operating at its full potential despite the low jobless rate?
“The following chart shows both headline and core inflation for the past 10 years. You can see that both have been below our 2% target for several years,” Kashkari writes. Core inflation excludes volatile food and energy costs.
“Twelve-month core inflation is at 1.7%, and while it seems to be moving up somewhat, it is doing so slowly, if at all. It is still below target, and, importantly, even if it met or exceeded our target, 2.3% should not be any more concerning than the current reading of 1.7%, because our target is symmetric.”
Another source of concern for Kashkari: “
Survey measures of long-term inflation expectations are flat or trending down.”
In addition, while the official unemployment rate is at a historically low 4.8%, low participation and high long-term unemployment are still problematic. “The U-6 measure suggests that there may still be additional workers who might re-enter the labour force if the job market remains healthy,” wrote Kashkari, referring to a broader jobless rate that includes discouraged workers and those working part-time but want a full-time job.
Add to that the uncertainty generated by some of the recent political chaos in Washington, and the case for a near-term Fed rate hike becomes much less compelling.