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Fed's Neel Kashkari says interest rate hikes "not required"

Neel Kashkari, president of the Minneapolis Federal Reserve, in an interview on February 17, 2016.

David Orrell | CNBC

The Federal Reserve failed to raise interest rates during the recovery, part of a policy implementation that rejected key signals and threatened to send the economy to the recession, said former President Neel Kashkari on Thursday.

In an unusually harsh punishment of the central bank's actions, Kashkari said that the central bank should not have tightened monetary policy with inflation so low. Instead, he said that the federal open market committee could signal that inflation could go higher than the 2% target, a step that would give a clear signal that the Fed is looking to stimulate the economy.

FOMC raised prices nine times from December 201

5 as part of an attempt to normalize the policy after the extreme housing that was made during and after the financial crisis and the major recession. These hikes also came when inflation was far below Fed's target.

"In my opinion, these increases were not required by our symmetrical frames," said Kashkari during a speech in Santa Barbara, California.

The remarks came as part of a review by the Fed of its framework and approach It has taken it back to life.

They also jib close with feelings from the White House. President Donald Trump has repeatedly criticized the interest rate hikes and has said the economy would be much stronger if the Fed support was suspended.

While acknowledging the aggressive measures taken by the central bank – setting the target rate close to zero and carrying out three rounds of asset purchases that took their balance sheet to $ 4.5 billion – Kashkari said the Fed would have kept its foot on the pedal.

He based his position on a labor market that is still growing despite the fact that wage increases are still thin and inflation is on average about 1.6%.

"With inflation a little too low and the labor market still showing capacity after 10 years, the only reasonable conclusion I can draw is that monetary policy has been too tight in this recovery," he said.

Kashkari said one of the biggest problems was that Fed officials did not see how low unemployment could go without generating inflation. The current unemployment rate is 3.6%, the lowest reading of almost 50 years.

"I think we were misleading the labor market and thought we had maximum employment when, in fact, millions of Americans still wanted to work and fear that if we hit maximum employment, inflation could suddenly increase and we would have to raise prices quickly to contain it," he said.

"The leading unemployment has given a wrong signal," he added.

Even with low frequencies, another meter remains that includes discouraged workers and those who hold part-time positions for economic reasons remain 7.3%, reflecting slack in the labor market.

Kashkari said the tightening cycle lesson is that the Fed will probably want to become even more aggressive with the policy of the next downturn. Evidence of an increase too soon came in the fourth quarter of 2018, when the markets feared that the Fed would continue to raise interest rates and reduce its balance and be aggressively sold.

"Perhaps we had achieved maximum employment already if monetary policy had been more accommodating," he said, adding that "by raising tax rates faster than required by our symmetrical frameworks, we ran the risk of overrun and caused a recession. Markets signaled this risk with the sharp decline in bond yields and stock prices by last year. The FOMC's rapid adjustment to pause further rate hikes was appropriate and unfortunately seems to have mitigated this risk for now. "

But he said he feared what could happen next time if the Fed doesn't do a better job of listening to financial and market signals.

"In order for our current frameworks to be effective and credible, we must go and actually allow inflation to climb modestly over 2 percent to show that we are serious about symmetry," Kashkari said. . "Make-up strategies like price-level targets offer this attractive feature. But we must honestly ask ourselves: If we felt compelled to raise prices when inflation was below target at this recovery, we would really keep prices low when inflation is above target next time? me so skeptical. "

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