- Minneapolis Fed President Neel Kashkari counters critique the Fed is helping the rich by arguing that its support for the labour market is essential to most Americans.
- The biggest contribution Fed officials can make is to maintain a full-employment economy so workers finally see wage gains after a long period of stagnation.
- Low inflation allows the central bank to pursue a continued low interest rate policy, says Kashkari, who favours leaving monetary policy on hold until the economy improves further.
One of the most ubiquitous critiques of the Federal Reserve’s low-interest rate policy has been that it has goosed asset markets, particularly stocks that are owned mostly by the rich, while not doing much for wages, thus exacerbating a long-term trend toward greater economic inequality.
Neel Kashkari, president of the Minneapolis Fed and a vocal advocate of aggressive monetary policy action to support the economy, has heard it often before.
However, he tells Business Insider, there’s a simple, one word-retort to the haters of a US central bank that has remained proactive through a historic recession and long but shallow recovery: jobs.
“I simply point out that for the most valuable asset they have is not their 401(k) if they have one, it’s not their house, it’s their job, by far,” Kashkari said.
The Fed has a dual mandate of stable inflation and maximum employment. Unemployment spiked sharply during the Great Recession as nearly 9 million jobs were lost and the jobless rate surged as high as 10%. It has since come down to a 17-year low of 4.1%, while inflation has consistently undershot the Fed’s 2% target, in part because of slow wage growth.
“By trying to drive higher wage growth through our monetary policy we are in effect trying to drive the value higher of the most valuable asset for the vast majority of Americans,” Kashkari said.
“Someone needs to explain how raising rates and slowing down the job market, even if that were to put a damper on asset prices,” he added. “How does that help those working folks? To me that argument collapses under scrutiny.”
The power of a strong labour market
Even beyond an aggressive interest rate policy that stimulates investment and hiring, Kashari said, there’s much the central bank can do in its roles as both bank regulator and research powerhouse to exercise a useful community development function that allows the Fed’s work to reach areas of highest economic need.
“We have a huge contribution to make because we have this enormous, in some sense unparalleled research capability across the Federal Reserve system,” Kashkari said.
The Minneapolis Fed recently launched the Opportunity and Inclusive Growth Institute, he said, “to try to Marshall the Fed’s research capabilities to unravel some of these complex issues, some of which we know we don’t have the tools ourselves but if we can arm legislators for example with data and analysis in a nonpolitical nonpartisan way then we think that’s an important contribution for us to make.”
One of the benefits of the regional Federal Reserve system, with its 12 district banks, is that each president brings a fresh regional perspective on the economy. Kashkari said his recent travels around the 9th district have only reinforced his faith in the power of interest rates to stimulate optimism about the future, and thus more and better employment.
“One of the things I’ve been surprised by as I travel is that companies are [now] doing extraordinary things to try to meet workforce needs,” Kashkari noted. “They are training workers themselves or they’re giving ex-cons a chance who would have otherwise not had had a chance.
“It dawned on me if you tried to design a fiscal policy program to motivate all of these private sector actors to do this it would cost billions and billions of dollars. It might not even possible to design this kind of program to have this kind of an effect. As opposed to the price signal of a tight labour market that’s being sent across the entire economy. So that’s making me realise that monetary policy does have a role to play – if we can get the expansion going have a tight job market we’re motivating the private sector to do all of really good things that are better for them and better for society as a whole.”
The Fed has raised interest rates five times since December 2015 to a 1.25%-1.5% range, having left them at zero for seven years. Kashkari dissented against all three of last year’s rate increases, preferring to see further evidence of economic strength before tightening monetary conditions any further.