Minneapolis Fed President Neel Kashkari said he’s “comfortable” with interest rate moving back to a “neutral rate”. That is, a level that’s “not stimulating the economy, but not also constraining the economy”. After that, Kashkari would prefer to ” just wait and see how inflation evolves.” And, Fed could the observe whether wage growth, inflation data support moving to a contractionary policy. But so far, according to Kashkari, the data “does not” support moving into contractionary policy.
A question that Fed policymakers are facing the the lack on acceleration in inflation even though unemployment rate dropped to as low as 3.8% last month. It’s commonly believed that inflation would surge to pull unemployment rate back up to the natural rate level. Kashkari pointed out that “in a recession, economists tend to raise the natural rate of unemployment”. However, during recovery, we’re so reluctant to then lower it, and we end up being late lowering it in recovery.” Nonetheless, Kashkari said he’s not ready to believe that natural unemployment rate to be as low as 3.5% as that’s a big departure from historical data.
