Neel Kashkari, President of the Federal Reserve Bank of Minneapolis, stated Monday that the Federal Reserve’s current monetary policy might not be as tight as previously assumed, given the evolving economic conditions.
Kashkari asserted that the perceived tightness of the Federal Reserve’s monetary policy may be overestimated, especially in light of the prolonged low-rate environment before the pandemic.
His comments follow Fed Chair Jerome Powell‘s remarks during an interview with CBS’s “60 Minutes Overtime.”
Powell stated that inflation is not yet under control and emphasized that the Federal Reserve would need to see more positive data before considering a reduction in interest rates.
Reassessing Monetary Policy Tightness
“The current stance of monetary policy may not be as tight as we would have assumed,” Kashkari wrote, indicating a possible recalibration of what is considered a ‘neutral’ policy stance in the post-pandemic era.
According to the Minneapolis Fed President, the threshold for what is considered neutral, or neither stimulative nor restrictive, monetary policy could be higher in the current context, providing the Fed with more room to maneuver before adjusting interest rates.
In explaining that monetary policy might not be as tight as previously imagined, Kashkari highlighted areas of surprising strength in the economy, such as the resilience of interest-rate-sensitive sectors like construction, which has seen employment numbers rise to all-time highs despite the Fed’s tightening cycle.
Furthermore, the stability of home prices and the rise of homebuilders’ stock prices reflect a robust housing market, contributing to record household wealth levels.
Evidence Of Economic Resilience
Kashkari asserted that the U.S. economy has demonstrated surprising robustness, with growth accelerating in the second half of 2023.
Simultaneously, the rapid approach of core inflation towards the Fed’s target underscores significant progress in the inflation containment efforts.
The Minneapolis Fed President believes this reassessment allows the Federal Open Market Committee (FOMC) “time to assess upcoming economic data before starting to lower the federal funds rate, with less risk that too-tight policy is going to derail the economic recovery.”
Despite some…
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