Kashkari: Federal Reserve Doesn’t Need to Protect Investors

Another Federal Reserve president has spoken out on interest rates. Neel Kashkari says there is no need for interest rate hikes right now but that the US Federal Reserve does not exist to protect investors.

Though the stock markets are exhibiting “nervousness,” says Kashkari, investors have to figure out what to do next.

We are not here to protect investors from losses. This is a capitalistic economy we live in and if investors take risks, they should bear the consequences of those risks.

But, says the Minneapolis Federal Reserve chief:

We pay attention to the stock market.

No Reason to Apply Economic Brakes

Kashkari, echoing Atlanta Federal Reserve President Raphael Bostic’s recent comments, believes it’s time to stop interest rate hikes:

I don’t see any reason that we need to tap the brakes pre-emptively on the economy, let’s let the job market continue to strengthen and wages and inflation pick up and we can always raise rates then.

Bostic said last week that, amidst uncertainty:

The appropriate response is to be patient in adjusting the stance of policy and to wait for greater clarity about the direction of the economy and the risks to the outlook.

After a slew of interest rate hikes in 2017 and 2018 and a declining equities markets at the end of 2018, the US Federal Reserve took the pressure off the markets early this January. Federal Reserve Chair Jerome Powell said:

We will be patient as we watch to see how the economy evolves.

The markets responded, with five days of consecutive gains.

S&P 500 (Blue) Dow Jones Industrial Average (Red) and Nasdaq (Yellow) Performance Over the Last Year | Source: Trading View

Federal Reserve United and Independent

Federal Reserve Vice Chairman Richard Clarida has since said the Federal Reserve could be “very patient.”

Kashkari’s comments on investors come in defense of US President Donald Trump’s attacks on the central bank. He says the Federal Reserve is “united” in its independence and focus on data.

Federal Reserve Chair Powell knocked back Trump’s criticisms as the market struggled in late 2018, saying he would not resign. The Federal Reserve is an independent body, and despite Trump’s comments, he cannot fire Powell or force him to quit.

With further interest rate hikes in the near future now very unlikely, investors appear more confident despite other concerns. The Dow Jones Industrial Average ended the day up 141 points or 0.59%.

Author: Melanie Kramer  
Image Credit:  Featured Image from Flickr/ProPublica

Is Carney an unreliable boyfriend – or just sensitive?

It all seemed a lot clearer in February. At the publication of its economic health check three months ago, the Bank gave a clear signal that interest rates would rise rather more quickly than expected.

Global growth was strong and the UK economy was caught in its positive tailwind.

Real incomes were starting to rise and inflation was still stubbornly above the 2% target.

Commentators started talking confidently of a rate rise this month and another one in the autumn.

The markets were so bullish they priced in a 90% probability of a hike before today was out. All such talk has withered.

Interest rates will remain at 0.5%.

Bounce back

Today the Bank struck a much more doveish note on the future path of interest rate rises – a doveish note first revealed by Mark Carney, the Governor, in his BBC interview last month.

The judgement has to be now that the next interest rate increase – unless there is a strong bounce back in the economy or inflation starts rising substantially again – will be far later this year.

The why is clear.

The economy took a major pounding in the first three months of 2018, with growth falling to 0.1% – well below the Bank’s own February forecast of 0.4%.

Although the Bank says that growth for the rest of the year will be stronger, that first quarter figure has led to a significant downgrade in the overall economic forecast for 2018.

Some of that is down to the poor weather, with the Bank being more aggressive about the negative effects of the Beast from the East (“a significant driver of reduced activity”) than the Office for National Statistics.

Then there are the “exceptional circumstances” of Brexit – which the Bank says it has to keep constantly in mind.

Global growth has also eased slightly and there is some evidence of declining consumer confidence alongside a softer housing market.

All in all, the Bank has become more cautious about the performance of the economy.

Consumer confidence

Yes, employment levels remain strong.

Incomes are rising slightly faster than inflation.

And the Bank does expect growth to bounce back over the rest of the year – alongside inflation falling more rapidly than expected over the next two years.

But there are just too many erratic’s for the Monetary Policy Committee to feel confident that now is the time to raise rates.

How will the increase in oil prices following America’s decision to pull out of the Iranian nuclear agreement affect inflation?

Will that miserable Q1 growth figure be revised upwards, as Q1 figures have been in the past, particularly those affected by the weather?

Will consumer confidence return?

Will there be a major Brexit break-through?

The critics might gather.

Wait and see

Is Mr Carney revealing once again his “unreliable boyfriend” tendencies, promising that interest rate rises are just around the corner, only to pull back?

He might suggest that he and the other eight members of the MPC are less the unreliable partners, more the “sensitive” listeners.

Sensitive to changes in the data which effect a decision based on fine margins and delicate judgements.

It was John Maynard Keynes who said that when the facts changed, so, sir, did he.

Today the Bank has changed tone.

Let’s wait and see, it is saying.

Let’s wait and see how the economy develops until we give any firm guidance on the path of interest rates beyond the Bank’s often used formulation of some limited rises “over the forecast period” of the next three years.

Yes, they will rise at some point.

But the chances of that happening sooner rather than later has receded.


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Author Kamal Ahmed 
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