The new forecast of the Federal Reserve System (FRS) regarding the future direction of monetary policy (forward guidance) could be clearer, said the head of the Federal Reserve Bank (FRB) of Minneapolis, Neil Kashkari. Kashkari was one of two members of the Federal Open Market Committee (FOMC) who voted against his decisions last Wednesday.
As reported, the FOMC has made significant changes to the text of the statement published following the meeting, outlining the conditions that will require the rate to be kept close to zero.
The FOMC believes that keeping the base rate in the 0-0.25% range will remain appropriate “as long as conditions in the US labor market are not in line with the Fed's notion of” full employment “, inflation reaches 2%, and to exceed 2% for a while. ”
On Friday, Kashkari noted that he “fully supports” the very fact of publishing forward guidance, considering it a “positive step forward.” However, he would have preferred the FOMC “to be more clear about its commitment to keeping rates in the same range until there is confidence that the Fed will achieve its dual mandate goals,” writes The Wall Street Journal.
In a FOMC statement following the September meeting, it was said that Kashkari would like the forward guidance to indicate the Fed's intention “to keep the rate in the current range until core inflation is stable at 2%.”
According to Kashkari, it has always been difficult for the Fed to understand at what point the labor market starts to overheat, and a misjudgment of that moment has forced the central bank to pursue tighter-than-required monetary policy in recent years to counter the threat of inflation, which in fact did not exist.
The problem with the new forward guidance of the FRS is that the expectations of the Central Bank regarding future policy are based on an unknown variable – “the level of full employment,” Kashkari said. When it comes to assessing the potential of the labor market, “making decisions in real time is difficult,” he said. “Avoiding direct references to maximum employment and forecasts of increased inflation would prevent the risk of underestimating the weakness of the labor market,” said Kashkari. When talking about a “stable” core inflation of 2%, Kashkari is referring to a period of about a year. If the growth rate of consumer prices significantly exceeds this level, the Fed can easily cope with it, he said.
Another Fed spokesman, St. Louis Fed Chairman James Ballard, said on Friday that US inflation in the next few quarters could be higher than Wall Street expects. “I really think that now is the moment when we can see some increase in inflation,” he said.
Among the factors that could increase inflation, Ballard noted the easing of the Fed's policy, large budget deficits, and potential “congestion” in supply chains, given the expected growth of US GDP by 30% in June-September.