Kashkari says Fed may have harmed economy with rate hikes

[NEW YORK] Federal Reserve interest-rate increases may be "doing real harm" to the US economy, which would help explain why inflation is low and job growth has slowed, said Minneapolis Fed President Neel Kashkari, one of the central bank's most dovish policy makers.

"It's very possible that our rate hikes over the past 18 months are leading to slower job growth, leaving more people on the sidelines, leading to lower wage growth, and leading to lower inflation and inflation expectations," Mr Kashkari said Tuesday during a talk at the University of Minnesota in Minneapolis.

"These premature rate hikes that we are embarking on, they're not free, and I think we need to remind ourselves of that."

His comments followed a speech earlier Tuesday in New York by Fed Governor Lael Brainard, who urged caution in raising interest rates again given low inflation. Officials are laying out their arguments ahead of a policy meeting later this month after a period of relative quiet over the US summer.

The US central bank is expected to leave rates on hold at its Sept 19-20 gathering in Washington while announcing the timing of a gradual process to shrink its US$4.5 trillion balance sheet. But the policy statement and officials' accompanying quarterly forecasts could signal a resolve to follow through with another rate increase this year, as projected when they met in June.

Mr Kashkari has been an outspoken critic of the Fed's drive to tighten monetary policy since he took over at the Minneapolis Fed in 2016. This year, as a first-time voter on the US central bank's rate-setting Federal Open Market Committee, he dissented against otherwise-unanimous decisions in March and June to raise rates.

LOW INFLATION

While US unemployment of 4.4 per cent last month was only slightly above the 16-year low set the month before, inflation has remained beneath the Fed's 2 per cent target for most of the last five years.

A record of the FOMC's last meeting in July showed policy makers puzzled over a recent deceleration in US consumer price inflation despite continued declines in the unemployment rate, which Kashkari said Tuesday "may be less perplexing than we think".

"We at the Fed might be making one of two fundamental mistakes: Number one, we might be overestimating how tight the labor market is," Mr Kashkari said.

"And number two, we at the Fed may have allowed inflation expectations to drift lower. Both of those, if those really happened, could explain the low wage growth, the low inflation, and the seemingly tight labour market."

In her remarks, Ms Brainard said the Fed needs to pay careful attention to underlying inflation before raising interest rates again.

"We should be cautious about tightening policy further until we are confident inflation is on track to achieve our target," Ms Brainard told The Economic Club of New York.

If inflation continues to fall short of the central bank's 2 per cent target, "it would be prudent to raise the federal funds rate more gradually."

The Fed has raised rates three times in the past year and investors see a roughly one-in-three chance they'll hike again in 2017, according to interest rate futures prices.

BLOOMBERG