Kashkari Says He Wanted Half-Point Rate Cut at Fed Meeting

(Bloomberg) -- Federal Reserve Bank of Minneapolis President Neel Kashkari said he argued the Fed should cut its benchmark rate by a half-percentage point at the U.S. central bank’s policy meeting this week.

“I advocated for a 50-basis-point rate cut to 1.75% to 2% and a commitment not to raise rates again until core inflation reaches our 2% target on a sustained basis,” Kashkari wrote Friday in an essay posted on the Minneapolis Fed’s website. “I believe an aggressive policy action such as this is required to re-anchor inflation expectations at our target.”

Kashkari and other participants on the Fed’s rate-setting Federal Open Market Committee concluded a two-day meeting Wednesday by leaving their benchmark rate target unchanged, while opening the door to a rate cut in coming months if the outlook deteriorates.

His comments were among several from Fed officials on Friday after the central bank’s self-imposed quiet period following its meeting expired.

Fed Vice Chairman Richard Clarida said in a Bloomberg Television interview that “the case for providing accommodation has increased.”

The Minneapolis Fed chief argued in his essay that “with inflation expectations falling further in recent months, I believe the committee should now take action to re-anchor expectations at 2%,” referring to the Fed’s target for the inflation rate.

Kashkari doesn’t have a vote on the FOMC this year. Wednesday’s decision among the committee’s 10 voters for 2019 was 9-1 to leave rates unchanged -- in a 2.25% to 2.5% range. It was not unanimous, with St. Louis Fed President James Bullard seeking a quarter-point rate cut. Bullard’s vote marked the first dissent of Powell’s 16-month tenure as chairman.

Read More: Fed’s Bullard Favored an Insurance Cut to Keep Economy Humming

In a blog posting on Friday explaining his dissent, Bullard said he favored a rate cut to guard against downside risks of too-low inflation and weaker growth.

“Even if a sharper-than-expected slowdown does not materialize, a rate cut would help promote a more rapid return of inflation and inflation expectations to target,’’ he said.

Kashkari made a similar argument. He noted that a measure of household inflation expectations compiled by the University of Michigan slipped to a record low this month, according to preliminary survey results. An alternative measure produced by the New York Fed dropped in May to the lowest level in two years.

Fed officials care about inflation expectations because they believe such views about the future go a long way toward determining actual inflation.

“Given that it has taken years for the markets to learn our current reaction function, I don’t believe a rate cut or two in isolation will do much to boost inflation expectations,” Kashkari wrote. “That is why I argued we should also commit to not raising rates from the new lower level until we see core inflation sustainably reach our target.”

Fed Governor Lael Brainard, speaking later on Friday, also sounded a note of caution. While the most likely path for the U.S. economy remains solid, she said that “important downside risks” had emerged in recent weeks and could weigh on growth.

“Basic principles of risk management” when interest rates are already low “argue for softening the expected path of policy when risks shift to the downside,” she said.

--With assistance from Christopher Condon.

To contact the reporter on this story: Matthew Boesler in New York at mboesler1@bloomberg.net

To contact the editors responsible for this story: Margaret Collins at mcollins45@bloomberg.net, ;Alister Bull at abull7@bloomberg.net, Jeff Kearns

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