Minneapolis Fed President Neel Kashkari says the central bank should begin raising interest rates gradually instead of risking a much larger increase later. He was one of three policymakers who dissented at last week's FOMC meeting in favor of a hike, while nine others voted to hold rates steady. Kashkari argues persistent supply shocks still threaten the inflation outlook even though he sees no evidence current policy is restrictive.
Neel Kashkari wants the Federal Reserve to start raising rates now, in small steps, rather than wait for more data and risk a much bigger jump later. The Minneapolis Fed president made the case in a CNBC interview from the Aspen Ideas Festival. According to CNBC: "I would rather get going now in small steps than wait till later", he said, warning that delay could leave the Fed with an entrenched inflation problem.
A three-way dissent
Kashkari was one of three policymakers who dissented at last week's meeting in favor of a 25-basis-point rate hike. The other nine members voted to hold the benchmark funds rate in a range between 3.5% and 3.75%.
No sign policy is restrictive
Kashkari said he sees no evidence that monetary policy is particularly restrictive right now, pointing to robust corporate earnings, resilient consumer spending and a labor market that continues to hold up well. Most of the recent inflation comes from supply shocks, with some demand layered on top, he said. He added that June inflation showed some improvement as oil prices temporarily retreated, but warned that persistent supply-side pressures continue to threaten the outlook.
A widening split at the Fed
His stance sharpens a growing divide within the FOMC. A day earlier, Philadelphia Fed President Anna Paulson argued that policy is already mildly restrictive and backed holding rates steady while officials assess incoming data.
Kashkari stopped short of endorsing a move at the Fed's Sept. 15-16 meeting, saying the decision will depend on data still to come. He also said Fed Chair Kevin Warsh encouraged him to exercise independent judgment rather than pressuring him toward a particular vote.
Traders currently price a slightly higher chance of a rate hike next month, with better odds by October.
Sources: Investinglive (snippet-based), ActionForex, CNBC
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