Fed's Kashkari Explains Dissent, Urges Balance-Sheet Plan

Federal Reserve Bank of Minneapolis President Neel Kashkari said little-changed economic data and his belief that job market slack remains pushed him to cast the lone dissent when the Federal Open Market Committee raised interest rates this week.

In an written explanation Friday, Kashkari said he would prefer the Fed publish a plan that explains how and when it will begin to normalize its balance sheet before hiking again, warning that financial conditions might tighten in response to that announcement. His comments come after Chair Janet Yellen said the Fed is actively discussing its balance sheet plans but has yet to make any decisions.

Kashkari, a first-time voter in 2017, dissented against the first major monetary policy move on which he had any formal say. Nonconformity colored his 13-page justification: he suggested the Fed in fact pays lip service to a symmetric inflation target while treating its 2 percent goal as a ceiling and he challenged the wisdom that gradual, pre-emptive increases are better than quicker hikes that respond to actual inflation. Kashkari also said slack persists in the labor market, despite low unemployment.

“I dissented because the key data I look at to assess how close we are to meeting our dual mandate goals haven’t changed much at all since our prior meeting,” said Kashkari, who managed the U.S. government’s $700 billion bank rescue fund in the 2008 crisis. “We are still coming up short on our inflation target, and the job market continues to strengthen, suggesting that slack remains.”

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Kashkari said the Fed’s balance sheet, swollen to $4.5 trillion by multiple rounds of mass bond-buying, shouldn’t become a regular policy tool. That thinking puts him in line with many of his colleagues. At the same time, he supported publishing a plan for unwinding the holdings “once data support tightening monetary policy.”

“It is imperative that we give the markets time to understand the details of the plan before it is implemented,” he wrote. “And while it is likely the announcement of that plan will not trigger much of a market response, we don’t know that for certain. The announcement of our balance sheet plan could trigger somewhat tighter monetary conditions.”

The Fed plans to stick with its existing policy of reinvesting maturing securities until rate normalization is “well under way," according to its release this week. Yellen declined to explain what exactly “well under way” means during her post-meeting press conference, leaving markets guessing about the path forward.

The Minneapolis Fed president, who at 43 is the FOMC’s youngest member, also suggested that there’s no reason to believe inflation will get out of hand quickly.

“As long as the FOMC remains committed to acting decisively to defend against sustained deviations from our 2 percent target, I see the risk of a sudden change in inflation expectations as low,” he wrote.