Fed's Kashkari Says Not Clear How Many Rate Cuts Economy Needs

(Bloomberg) --

One of the Federal Reserve’s most outspoken policy doves said the U.S. central bank should be supporting the economy given downside risks to the outlook, and it’s not clear yet how many more interest-rate cuts will be required to do so.

“As the economy appears to be showing more risks, business investment is slowing, the global economy is slowing, and inflation continues to come in below our target, my message is clear: We should be supporting the economy, not tapping the brakes," Minneapolis Fed President Neel Kashkari said Monday.

“I’m happy that we’re cutting interest rates. I don’t think we should have been raising them," Kashkari, who in recent years has been a dissenting voice against Fed tightening, told an audience in Prior Lake, Minnesota. “How much more do we have to cut? I don’t know yet.”

The once-red hot U.S. labor market is losing steam and data show weak activity in the services and manufacturing industries, as businesses become more cautious amid uncertainty over U.S. trade policy and weaker global growth. That’s led investors to boost bets the Fed will cut interest rates again later this month following reductions in September and July.

The Minneapolis Fed chief doesn’t have a vote this year on rate decisions made by the policy-setting Federal Open Market Committee, but he will in 2020. Two of Kashkari’s more hawkish FOMC colleagues, who are voters this year, took a different stance.

Speaking over the weekend, both Kansas City Fed President Esther George and the Boston Fed’s Eric Rosengren singled out consumer spending, which accounts for 70% of the economy, as a key variable. They said that so long as it remained vibrant there was no need to add additional accommodation, even as the manufacturing sector suffers and the trade war weighs on sentiment. They both dissented against the Fed cuts in July and September.

“If the economy grows at 1.7%, consumption continues to be strong, inflation is gradually going up and the unemployment rate is at 3.5%, I would not see a need for additional accommodation” at the Fed’s October or December policy meetings, Rosengren said on Saturday. He downgraded his growth forecast from 2% but said that overall, “the economy is right where we want it to be.”

Chairman Jerome Powell has been under relentless public pressure from President Donald Trump to reduce rates. On Friday, Powell gave no clear signal as to whether he favors the FOMC delivering another cut this year, saying that the economy was in a “good place” but faced risks.

He did not discuss the economy in brief remarks that he made on Monday, but is expected to do so in a speech Tuesday at the annual meeting of the National Association for Business Economics in Denver scheduled for 2:30 p.m. New York time.

At the September FOMC meeting, just seven of the 17 participants projected another rate cut following reductions at the prior two meetings.

Rosengren, who spoke on the sidelines of a Boston Fed conference, said the one factor that may change his outlook is the American consumer, who could pull back on spending if the stock market were to drop sharply, or if gloomy headlines over trade and geopolitical tensions mount.

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George suggested she’d be flexible if data look worse than she expects.

The Kansas City Fed chief also said she didn’t believe falling short of the 2% inflation target over much of the past seven years was a concern, partly because conversations with people across her district suggest slight misses aren’t an issue for ordinary Americans.

“The unemployment rate is near a 50-year low, inflation is low and stable, and the economy is growing near potential,” she said. “In the midst of the longest business cycle expansion in history, inflation running a few tenths of a percent below 2% is, in itself, not a compelling justification for providing additional monetary policy accommodation.”

--With assistance from Steve Matthews and Catherine Bosley.

To contact the reporters on this story: Matthew Boesler in Chicago at mboesler1@bloomberg.net;Christopher Condon in Boston at ccondon4@bloomberg.net

To contact the editors responsible for this story: Alister Bull at abull7@bloomberg.net, Vince Golle

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