The President of the Federal Reserve Bank of Minneapolis, Neel Kashkari, on Tuesday, May 28, during a conversation with media representatives, said that the financial regulator of the United States should wait for signs and evidence of more significant progress in efforts to combat inflation before proceeding with the implementation of the decision to ease the monetary policy strategy, which provides, in particular including the measures cutting interest rates.
Mr. Kashkari also answered the question about what conditions within the US economic system should be for the country’s central bank to lower the cost of borrowing once or twice in the current year. In his opinion, to form a final and firm confidence that the circumstances are favorable for cutting interest rates, it is necessary to obtain data on the positive dynamic of inflation for several more months. It is worth noting that a kind of consolidated position of Fed officials also provides that the practical implementation of monetary policy easing will be possible only when there are clear and unambiguous signs that countering the increase in the cost of goods and services has a significant result and at the same time provides positive prospects in the appropriate direction.
Moreover, Neel Kashkari said that he does not exclude the possibility that at some point the central bank of the United States will be forced to decide to raise interest rates as part of a response to the state of affairs in the economic reality of the country. According to him, the US financial regulator may take corresponding measures if the inflation rate leaves the downward trajectory, returning to the growth zone. In this context, Mr. Kashkari also noted that at present, any options for the actions of the central bank of the United States should not be excluded as part of the approach to the monetary policy strategy.
This year, the president of the Minneapolis Fed does not have the right to vote on the Federal Open Market Committee. It is this committee that decides on the level of interest rates. At the same time, Neel Kashkari can make statements about his vision of the most appropriate and adequate strategy for the activities of the financial regulator of the United States concerning the circumstances of economic reality in the context of the formation of the concept of monetary policy. The president of the Minneapolis Fed will have the opportunity to vote on the mentioned committee in 2026.
In April, the inflation rate in the United States rose by 0.3%. This result was perceived by the expert community and financial authorities as positive since the mentioned indicator turned out to be better than the preliminary expectations regarding its dynamic. Against this background, sentiment also improved regarding the prospects for easing the monetary policy of the central bank of the United States in the current year. At the same time, the positive dynamic inflation in the US cannot yet be characterized as unambiguously stable, since the result in one month is not a guarantee that the tendency is long-term. In this context, the position of Fed officials that additional data is needed to decide on lowering the cost of borrowing is fully justified and constructive. It is worth noting that inflation in the United States increased by 3.4% over the year.
During his conversation with media representatives, Neel Kashkari also expressed confidence that the US central bank will eventually be able to achieve its 2% inflation target. In this context, he separately noted that, in his opinion, there is no need to rush into the issue of monetary policy easing and make premature decisions about lowering the cost of borrowing. Mr. Kashkari is convinced that the US financial regulator should not rush and should do everything right.
The president of the Minneapolis Fed also said that in the future the central bank of the United States may consider raising its target rate, but it is currently impractical to change the corresponding indicator.
Moreover, this month Neel Kashkari suggested that perhaps the US financial regulator will have to keep borrowing costs stable for an extended period to achieve its goal. In this context, he did not rule out that the corresponding need will be observed until the end of 2024.
It is worth noting that at present, what can be described as a kind of inconsistency and diversity of opinions about the most appropriate moment for deciding on cutting interest rates is being recorded between the largest central banks in the world. In different regions of the world, financial authorities declare different approaches to the issue of changing the concept of monetary policy. Over the years, something like a standard practice has developed, in which the Fed makes the first decision on the level of interest rates. After that, financial regulators in other countries are shaping their approach to monetary policy, focusing on the strategy of activity of the central bank of the United States. Currently, there is a different state of affairs in the context of the interconnection of the steps of the financial authorities. The European Central Bank is expected to start cutting interest rates as early as June. Last Monday, May 27, two officials from the mentioned financial institution supported the relevant potential solution. At the same time, the Fed adheres to a strategy of cautious actions against the background of the current inflationary reality in the United States. It is also nowadays expected that the Bank of England will begin lowering the cost of borrowing in the coming summer. Last week, the Office for National Statistics released data showing that prices in the United Kingdom increased by 2.3% year-on-year in April. Against this background, expectations have increased that the UK financial regulator will begin easing monetary policy in the summer. It is worth noting that the Bank of England’s inflation target is 2%.
At the same time, Cleveland Fed President Loretta Mester said that the central bank of the United States should consider ways to better inform the public about how the circumstances and conditions of economic reality affect decision-making on monetary policy strategy. On Tuesday, during a speech at a conference organized by the Bank of Japan and taking place in Tokyo, she expressed the opinion that the comments of the financial regulator should be expanded. In this case, it is implied that Fed officials should inform the public about their assessment of economic development and their vision of potential risks to the prospects of the relevant process. Also, in her opinion, a more detailed quarterly summary of policymakers’ economic forecasts should be published.
Loretta Mester says that improved communications would make monetary policy more effective in normal times. Also, in her opinion, the proposed approach would improve the effectiveness of nonconventional policy in extraordinary times like the current state of affairs.
The president of the Cleveland Fed is taking part in the voting in the committee on the formation of the monetary policy strategy of the central bank of the United States this year. At the same time, she did not declare his point of view regarding the potential lowering of the cost of borrowing. Loretta Mester also refrained from public discussions on the prospects of the dynamic of the United States’ economic system.
Moreover, the president of the Cleveland Fed, noted that increasingly concise policy statements, which are often perceived as a virtue, can be problematic as each word takes on additional significance. Separately, she said that such comments make it harder for the public to understand the link between economic development and policy decisions. In her opinion, Fed officials should explain in more detail to the public what impact the economic situation has on the prospects and potential risks for these prospects. She says that paying more attention to risks would provide market participants and ordinary citizens with a better understanding of the nature of political decision-making. Loretta Mester also believes that scenario analysis should become a standard part of the communications of the central bank of the United States. In this case, it implies an explanation of how a certain configuration of economic reality affects the decisions of the US financial regulator in the context of monetary policy formation. She noted that this approach is especially useful in periods when the main structural elements of the economy may have changed.
Loretta Mester also said that the Fed should consider publishing an anonymous matrix that connects officials’ forecasts for interest rates with their forecasts for growth, unemployment, and inflation. She believes that combining the points of view would provide the public with a better idea of how each individual official will adjust depending on changing economic conditions. Loretta Mester has already stated the corresponding point of view in 2018.
Chicago Fed President Austan Goolsbee made a similar statement at an event at the Hoover Institute at Stanford University this month.
Loretta Mester will step down as president of the Cleveland Fed in June when her term of office expires.
Also at the Tokyo event, Michelle Bowman, a member of the Fed’s Board of Governors, focused her speech on the balance sheet of the central bank of the United States, the reduction of which has proceeded relatively smoothly. The financial regulator will slow down the pace of balance sheet reduction starting next month. Officials of the central bank of the United States also announced their intention to stop the relevant process when the level of bank reserves is above the level they deem ample. According to Michelle Bowman, the mentioned level has not yet been reached. She also expressed support for the expectation of a slowdown in the rate of asset runoff.
Michelle Bowman says that it is important to continue reducing the size of the balance sheet. According to her, these actions will allow the US central bank to achieve ample reserves sooner, while the economic system of the United States is still strong. She also noted that the mentioned reserves will help the Fed to use its balance sheet more effectively and reliably to respond to future economic and financial challenges.
