Conventional wisdom that inequality is a problem for elected officials to handle and beyond the reach of central bankers may be backward, said Federal Reserve Bank of Minneapolis President Neel Kashkari.
“Historically the Fed has always said distributional outcomes are not the purview of monetary policy — they are the purview of fiscal policy, and monetary policy only works around the edges,” Kashkari said Monday in an interview. “I actually am concluding it’s the opposite.”
Kashkari’s argument marks his latest joust against the majority view inside the Fed, where he has emerged as the most strident defender of low interest rates since he started working there in 2016. He dissented against all three rate hikes this year on the grounds that inflation is too far below the Fed’s 2 percent target, and published an essay on Monday that added to that criticism concerns over a flattening yield curve.
This year’s trend of rising employment rates alongside low wage growth and inflation is “likely going to continue in 2018,” which would ease the need for additional hikes next year, the Minneapolis Fed chief said. With inflation expectations so low, he would prefer not raising rates again until so-called core inflation, which excludes volatile food and energy prices and was just 1.4 percent in October, rises to 2 percent, he added.
A belief that monetary policy may be a powerful tool to address inequality would broaden the case for low rates. Fed policy makers have long taken the position that it’s not their job to foster greater income or wealth equality. Rather, their mandate from U.S. lawmakers is maximum sustainable employment and price stability.
Keeping its focus on these outcomes without handicapping the impact on who wins and who loses in the economy in the past helped insulate the Fed from politics. But its crisis-era policies of zero rates and massive bond-buying have been blamed for widening inequality by pumping up stock prices while wage growth remained anemic.
Fed officials say that their actions helped get millions of Americans into jobs, and point to an unemployment rate near a 17-year low. With the labor market running hot, Kashkari says that the central bank should keep providing monetary policy support, because businesses are starting to invest in workers in ways they otherwise might not have done.
“You are seeing a price signal sent throughout the entire economy, where you have lots of private-sector firms that are doing different things to try to bring in workers,” said Kashkari, who this year launched the Opportunity and Inclusive Growth Institute at the Minneapolis Fed to research why some groups are missing out on the benefits of the expansion.
“Maybe monetary policy needs to set the economic conditions where all of these private-sector actors are doing their part,” he said. “I’m just trying to think of: can you come up with a fiscal policy program that would motivate these private-sector actors to do all of this work? And it’s very hard for me to think of one.”