“The vast majority of Americans want to work, and I’m not ready to write them off – and I want to give them the chance to work,” Kashkari told Reuters in his first public comments since the Fed policy meeting ended. earlier this year. week. “As long as inflation expectations remain anchored… let’s be patient and really achieve as many jobs as possible. “
Kashkari’s remarks show he is in the decided minority in an increasingly hawkish Fed, which concluded a two-day meeting on Wednesday with an unexpected result: With inflation on the rise, most Fed policymakers see now a case to start interest rate hikes earlier.
Just three months earlier, the clear majority of policymakers were in favor of leaving the current level of borrowing costs unchanged; The central bank’s Quarterly Summary of Economic Projections (SEP) on Wednesday showed that 11 of the 18 Fed policymakers were planning at least two quarter-percentage point rate hikes by the end of 2023.
“I still don’t have a higher SEP forecast horizon because I think it’s going to take us a while to really hit the maximum jobs, and I think those higher inflation readings are going be transient, ”Kashkari said in an interview with Reuters.
In the interview, Kashkari said he believed the rise in prices was due to a reopening of the economy and would ease as supply constraints ease.
With employment still below its pre-pandemic level of at least 7 million jobs, he said, “the job market is still in a deep hole,” adding he thinks that full employment means at least a return to the strength of the pre-pandemic labor market. , if not beyond.
“Very orderly manner”
Kashkari, however, has shown little discomfort with the Fed’s decision this week to open a discussion about when and how to cut its $ 120 billion in monthly treasury bill and mortgage-backed securities purchases ( MBS), the first step in moving away from the extraordinary support for the economy that Kashkari says is still needed.
“I think (Fed Chairman Jerome Powell) is leading us down a very orderly path to have the discussion and look at the data and make those adjustments cautiously,” he said.
Once the Fed determines it’s time to cut back on its asset purchase program, Kashkari said, he expects to follow the same plan as in 2014, when the Fed cut back on MBS purchases. and treasury bills at a stable and predictable pace; Cutting back on MBS purchases faster, as some have proposed, would have only a modest chilling effect on the hot housing market, he said.
But, at least for Kashkari, it will likely take beyond September to have enough data to judge whether there has been enough progress in the job market to merit a change.
By the fall, he said, schools will be open again, the risk of Covid-19 infection will hopefully be reduced, and special pandemic unemployment benefits will be exhausted. While this should pave the way for more Americans to return to the workforce, it may take longer to see a difference in wages and labor force participation, two critical indicators of labor market participation. labor market strength.
His assessment of the labor market, he said, will color his assessment of the inflation data.
If there was less improvement in the labor supply than he hoped, Kashkari said, he might need to reassess his full employment assessment and, therefore, know to how close the labor market is to achieving this target, and whether the rise in inflation will stop brief from becoming persistent.
“The bar is very high for me to reach such a conclusion,” he said.
At least some of Kashkari’s colleagues may already be there, if the “dot plot” of the Fed’s rate hike expectations, released as part of the SEP, is any guide. They show that at least seven policymakers expect rates to take off next year, a number that includes St. Louis Fed Chairman James Bullard.
“It was meant to be a tool providing accommodating forward-looking guidance,” Kashkari said of the “dot plot”.
“It ended up being a tool that provided hawkish forward-looking indications… I still think we should just kill the ‘dot plot’. ”