Serious question, how long until Neel is out at the Fed? Clearly, he’s an independent thinker, espousing views that are very popular on Wall Street. His outward resistance against the Yellen hegemony is both entertaining and refreshing. However, I am skeptical he’ll be able to keep it up without suffering heinous consequences.
In an essay published on Friday, Fed’s Kashkari explained why he dissented against another rate hike, basically calling Yellen a pavement ape thinker.
He categorized the Fed’s decision to raise rates as being ‘faith’ based, saying, “For me, deciding whether to raise rates or hold steady came down to a tension between faith and data. On one hand, intuitively, I am inclined to believe in the logic of the Phillips curve: A tight labor market should lead to competition for workers, which should lead to higher wages. Eventually, firms will have to pass some of those costs on to their customers, which should lead to higher inflation. That makes intuitive sense. That’s the faith part.”
Kashkari added, “Unfortunately, the data aren’t supporting this story, with the FOMC coming up short on its inflation target for many years in a row, and now with core inflation actually falling even as the labor market is tightening. If we base our outlook for inflation on these actual data, we shouldn’t have raised rates this week. Instead, we should have waited to see if the recent drop in inflation is transitory to ensure that we are fulfilling our inflation mandate.”
Bug eyes tried to describe the downside of being patient, which of course is a scenario forged in fantasy land.
“So what’s the downside risk of waiting to see if the recent inflation moves are transitory? I can only think of one really concerning downside risk: a sudden, rapid unanchoring of inflation expectations. A slow drift upward of inflation expectations doesn’t concern me too much, because I believe the FOMC will respond and keep them in check.
The scenario to worry about is that somehow we break inflation expectations: We wake up one morning and instead of 2 percent, they jump to 4 percent. The FOMC would have to respond very powerfully to re-anchor them at 2 percent. I believe we would do what was necessary, but the short-term economic costs might be large.
Policymakers are concerned about this risk, but it is a risk based on faith in a sudden return of the Phillips curve and not a risk that we can detect in economic, financial or survey data. Because it is based on faith and not on data, it is a difficult risk to quantify.
The outcome that the current FOMC is so focused on avoiding, high inflation of the 1970s, may actually be leading us to repeat some of the same mistakes the FOMC made in the 1970s: a faith-based belief in the Phillips curve and an underappreciation of the role of expectations.”
In the 1970s, that faith led the Fed to keep rates too low, leading to very high inflation. Today, that same faith may be leading the committee to repeatedly (and erroneously) forecast increasing inflation, resulting in us raising rates too quickly and continuing to undershoot our inflation target.”
In all, Neel Kashkari mentioned ‘faith’ 8 times in his explanation for not going along with Yellen’s ruinous plan. Yellen’s Fed eternally BTFO.
Happy Father’s Day.
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