Minneapolis Fed President Neel Kashkari speaks during an interview in New York, on Feb. 17, 2016.Brendan McDermid/Reuters
Minneapolis Federal Reserve Bank president Neel Kashkari said on Friday that the yield curve, which to his surprise inverted earlier this week, shows investors believe growth will slow and may be signalling the Fed has tightened policy too far.
In an interview on Fox Business Network, Mr. Kashkari said that while he opposed the Fed’s recent rate increases, a recession for the United States is not his base case this year, although the risks are elevated.
“A big question mark that we wrestle with is what interest rate represents neutral. … I do think it’s giving us feedback on where neutral is,” Mr. Kashkari said. “Have we gone above neutral? I still don’t think we have, but it’s certainly possible and I don’t think we should be at a contractionary stance.”
The yield on U.S. three-month bills exceeded that on 10-year notes last week for the first time in over a decade. This so-called inverted yield curve is seen as a warning that a recession may follow in the next one to two years.
Asked if there could be a recession in 2020, Mr. Kashkari said he believes the recession odds are elevated, based on the signals from the yield curve. “But it’s not my base case,” he added.
“My base case is still for continued economic growth … just slower growth” than 2018, he said. But there is still uncertainty on the outlook, he said, and “that’s why I think our current posture of pausing to get more data makes a lot of sense.”
The Fed earlier this month held its target range for short-term rates steady at 2.25 per cent to 2.5 per cent, and most policy-makers forecast there would be no need for rates to rise for the rest of this year.
That is a position Mr. Kashkari has had for years, as he has pushed colleagues to see slow wage growth and muted inflation as signs the labour market still has slack, despite an unemployment rate that is now 3.8 per cent.
Asked if a rate cut would be in order, Mr. Kashkari demurred.
“I don’t think it would be healthy for us to be chasing the market,” he said. “We need to get more data to see what’s really happening before we make any policy shifts.”
Mr. Kashkari said he will be looking at jobs and wage growth, GDP and consumer and business spending to gauge how the economy is faring and what the Fed should do next.
Wage growth has been accelerating for lower-paid jobs, he said, and that bodes well for consumer spending in the future.