Neel Kashkari Pushed For ‘Big League’ Rate Cut, Ultra-Dovish Forward Guidance On Wednesday
Early Friday, Jim Bullard explained the rationale behind the first dissent of Jerome Powell's tenure as Fed chair.
Not to be outdone (or out-doved, as it were), Neel Kashkari (who isn't a voter this year) decided to publish a lengthy blog post explaining why he advocated for a 50bp rate cut at the June meeting.
Not only that, Kashkari sounds like he wanted the Fed to adopt aggressively dovish forward guidance that would have entailed a pledge "not to raise rates again until core inflation reac
Maybe he is hoping to get Trump’s attention, “Fire Powell and appoint me!”.
My thought exactly. A Bullard-Kashkari cage match to the death hosted by Trump is not out of the question.
If you read his treatise it appears eminently reasonable. Unlike a lot of present Fed governors and bank presidents, Kashkari got a good look at what cleaning up a financial mess looks like up close and personal (he was the right hand of the US Treasury Secretary when it happened). The Fed knows well how to tighten policy if inflation accelerates beyond what is desireable. What they do not have a great handle on, is when the economy falters and they are near the zero bound in short rates. Reducing rates now, and fast may not prevent a recession, but it will help shorten the duration and severity of an upcoming slowdown. The balance of risks now is a recession and disinflation/deflation not a runaway inflation unsustainable boom. Risk management would suggest leaning dovish now. There will be plenty of time for the tight later for the tight money crowd to move in and raise rates later on when the economy can stand it.
What his analysis ignores is:
– Most of the recent (L6M) weakness in economic indicators is caused by changing government positions on trade. This is pretty evident from which indicators have rolled and which have not.
– The changes in positions are primarily by the US. China, EU, Mexico etc have positions too but they are reacting to / led by US positions.
– US positions are to a great degree dependent on short-term movements in financial markets. This has been discussed a lot on this blog.
– Fed policy is a major driver of short-term movements in financial markets.
– This chain of effect is: looser [tighter] Fed -> higher [lower] financial markets -> more [less] aggressive US government positions on trade -> downward [upward] pressure on economic indicators.
– So looser Fed monetary policy will indirectly drive financial markets higher and economic indicators lower.
– Markets and economies cannot move apart indefinitely. At some point, something breaks.
– Or, the chain breaks. The middle link “higher [lower] financial markets -> more [less] aggressive US government positions on trade” is entirely at the discretion of the US government.