By Michael S. Derby
New Federal Reserve guidance over the future path of rates fell short of what was needed, Minneapolis Fed leader Neel Kashkari said Friday.
"I strongly support" the new guidance, Mr. Kashkari said explaining his vote. But he also said, "while I believe the statement is a positive step forward...I would have preferred the Committee make a stronger commitment to not raising rates until we were certain to have achieved our dual mandate objectives."
The central banker was one of two regional bank presidents who voted against the outcome of the rate-setting Federal Open Market Committee on Wednesday. Then, officials held their short-term rate target steady and said that they would keep their short-term target rate very low until the job market had reached its maximum sustainable level, and inflation had risen to 2% and was on a path to moderately overshoot that goal.
The FOMC statement said Mr. Kashkari instead preferred that the Fed would pledge to hold off on raising rates until it had achieved core inflation levels of 2% for a sustained period.
In his defense of his dissent, Mr. Kashkari said that the Fed has long struggled to understand the point at which labor markets are starting to overheat, and a misreading of that level had caused the central bank to implement tighter monetary policy that was justified in recent years, as it sought to ward off inflation threats that didn't exist.
Mr. Kashkari said the problem with the Fed's new guidance is that it still holds onto the importance of a basically unknowable variable, that maximum sustainable job level.
When it comes to reading the job market's inflation potential, "those are difficult judgments to make in real time," he said. "By eliminating both the direct reference to our assessment of maximum employment and any forecast of inflation climbing," Mr. Kashkari said his idea "guards against the risk of underestimating slack in the labor market," the officials.
Mr. Kashkari said that for him, the amount of sustained 2% core inflation would likely last roughly a year. He added that if inflation were to heat up unexpectedly, the Fed could easily deal with that.
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