Neel Kashkari is the President of the Minneapolis Federal Reserve Bank. Kashkari was the only dissent at March 15 FOMC meeting, when the fed funds rate was increased by 25 bps to a range of 3/4 to 1 percent. Kashkari published an article, Why I Dissented, a couple days later to explain his decision-making process. This article provides clear insight into the mind of central banker who believes there is more slack in the labor market.
Kashkari first looks at inflation. The Fed's stated inflation target is 2% which Kashkari distinguishes from the ECB's inflation ceiling of 2%. Kashkari goes on the highlight the Fed's inability to accurately forecast inflation, pointing out medium-term inflation forecasts have been too high 100% of the time over the past 5 years.
Kashkari highlights contained inflation expectations.
Kashkari goes on to discount the market-based measures of long-term inflation expectations, because... "financial markets are guessing about what fiscal and regulatory actions the new Congress and the Trump Administration will enact."
Inflation is running low in most developed economies, not just the U.S..
Then Kashkari gets into the employment side of the dual mandate. He highlights the U-6 measure of unemployment which includes people who have given up looking for work or are involuntarily part-time.
Kashkari sees some remaining slack in the labor market from several sources. First, the U-6 unemployment rate is still 1% above the pre-recession level. Second, the recent relative strength in jobs per month (averaging 200,000 versus 80,000-120,000 labor force growth) has not moved the headline unemployment rate much below 5% because more people want to work than are being captured by the employment models and surveys. The employment-population and labor force participation ratios, for ages 25-54, also remain below pre-recession levels.
Kashkari admits the Fed does not know for certain the level of maximum employment and acknowledges this target changes over time. As evidence, Kashkari points to the Fed's own 5.6% estimate of maximum employment from 2012 which we now know was definitively too high. Kashkari sees the labor force continuing to grow, either by workers re-entering or choosing not to leave, which has kept a lid on inflationary pressure so far.
Finally, Kashkari says the current level of the neutral real interest rate is 'around zero'. With inflation at 1.7% and a target range for the real fed funds rate between -0.95 percent and -0.7 percent, Kashkari sees monetary policy as somewhat accommodative.
I like Kashkari's transparency. His opinion is worth a read.
Michael Grove, CFA