Fed's Kashkari Gains Company in Concerns Over Raising Rates

Neel Kashkari labored through much of this year as the most prominent Federal Reserve official opposed to raising short-term interest rates. Lately, he's gained more company.

Mr. Kashkari, president of the Minneapolis Fed, has argued the central bank shouldn't be raising borrowing costs when inflation persists below its 2% target. He cast the only votes against the Fed's rate increases in March and June.

Fed officials in June penciled in one more rate rise this year, with most sharing Chairwoman Janet Yellen's view that inflation would likely pick up amid a tightening labor market. Since then, however, a string of largely disappointing price readings have given officials doubts about whether they'll be in a position to raise rates again later this year. Several now say they want to see more evidence of strengthening inflation before they'll support another rate move.

Mr. Kashkari "has proven himself with a fairly prescient view on the economy that is hard to ignore" given inflation's performance, said Tim Duy, an economics professor at the University of Oregon.

Shawn Sebastian, an activist with the left-leaning group Fed Up, commended Mr. Kashkari for pushing back against higher rates. "He is the one making an argument that reflects real-world data," he said.

The Fed is likely to leave rates unchanged at their meeting this week, and officials' new projections to be released Wednesday will show how many still expect to lift rates again before year's end.

A few other Fed officials voiced concerns similar to Mr. Kashkari's earlier in the year but either voted to raise rates or don't hold voting seats on the central bank's rate-setting committee in 2017, due to its annual rotation system. His votes turned him into the Fed's most public dissident, drawing an unusual degree of attention for a relatively new central banker.

Mr. Kashkari has been less lonely lately. Leaders of the Chicago, Dallas and Philadelphia Fed banks have said recently they want to see higher inflation before approving another rate rise. Fed governor Lael Brainard said recently " we should be cautious about tightening policy further until we are confident inflation is on track to achieve our target."

Unlike most Fed officials, Mr. Kashkari isn't an economist. Before joining the joined the Minneapolis Fed in early 2016, he was best known as the man who had overseen the Treasury Department's $700 billion Troubled Asset Relief Program, a crisis-era bank rescue effort. He's focused most of his energies during his Fed tenure on financial regulation issues, primarily proposals to prevent future bailouts of firms so big their failure would threaten the financial system.

He has masters' degrees in engineering and business administration, has worked at Goldman Sachs Group Inc. and Pacific Investment Management Co. and ran unsuccessfully as a Republican candidate for California governor.

Mr. Kashkari said in early September his monetary policy views are guided by the data. "We are coming up short in our inflation mandate, there still seems to be slack in the labor market, wage growth is not high -- why are we raising rates?"

This year's inflation puzzle has challenged the Fed economists' long-held assumptions about how the world works. Ms. Yellen and others expect falling unemployment to eventually fuel faster gains in wages and prices. But joblessness fell to a 16-year low of 4.3% in July while inflation remained soft.

In June, Ms. Yellen attributed tepid inflation to transitory factors. In July, she said she still expected price pressures to heat up, but added the Fed could change its policy plans if that didn't happen.

A pickup in inflation in August provided the first evidence in many months that Ms. Yellen might prove right. But Fed officials want to see several more such reports before lifting rates again.

Mr. Kashkari now wonders whether the Fed's four rate rises since late 2015 may have helped weaken inflation. He said in a public appearance Sept. 5. " Maybe our rate hikes are actually doing real harm to the economy."

He may not prevail in convincing his Fed colleagues to hold interest rates steady through year's end. After the August inflation report was released Thursday, traders in futures markets boosted the probability of a December rate move to just over 50%, according to CME.

J.P. Morgan economist Michael Feroli told clients Thursday the latest data "should ease some of the low inflation concerns among wavering [Fed] officials, and we continue to expect the leadership will prevail in getting another hike in at the December meeting."

Write to Michael S. Derby at michael.derby@wsj.com

(END) Dow Jones Newswires

September 19, 2017 13:44 ET (17:44 GMT)