Neel Kashkari is glad people are finally listening to him.
He writes today, “Since I became president of the Federal Reserve Bank of Minneapolis in January 2016, I have advocated against interest rate increases because I did not see sufficient evidence that inflationary pressures were building, and I believed there was still slack in the labor market.” Since other Fed policy-makers disregarded Kashkari’s warnings and raised rates anyway, he now says they should cut rates by half a point — which, coincidentally, is also what the Trump White House explicitly says it wants.
Short-term interest rates are set by the Federal Open Market Committee, a body that consists of the seven governors of the Federal Reserve Board, the president of the Federal Reserve Bank of New York, and four rotating members chosen from the presidents of the other 11 Federal Reserve banks. Kashkari does not currently sit on the FOMC, though when he last did, in 2017, he opposed all three rate hikes the FOMC implemented that year.
At the time, he did not have a lot of allies. There has been until recently a consensus among most decision-makers at the Federal Reserve that economic conditions merited a “normalization” — read modest increase — in interest rates. But now, as the economic outlook has softened somewhat, and as President Trump has loudly demanded interest-rate cuts, more people are coming around to Kashkari’s view. The dovishness advanced by Kashkari has influenced recent Fed decisions, including the end to the rate-hike campaign after the stock-market swoon in December and this month’s guidance telegraphing strongly that there will be a rate cut of at least a quarter-point in July.
In his efforts to get the Fed to ease, Trump has floated some ridiculous names as possible Federal Reserve governors. He proposed — but never formally nominated — his sycophantic economic adviser Steve Moore and former fast-food executive and political candidate Herman Cain for the board’s two currently empty seats. Both Moore and Cain have histories of ultrahawkish commentary about the Fed, and their shift to sharing Trump’s love of low interest rates is unconvincing as evidence of anything other than political hackery. Both also had records of offensive comments and, in Cain’s case, sexual-harassment allegations. Even with a Republican majority, the Senate was not going to confirm them.
This raises an obvious question: If Trump wanted to move the Fed in a dovish direction, why didn’t he try to put Kashkari on the board, or even nominate him for chairman instead of Jerome Powell back in 2017, when Kashkari’s dovish credentials were already established? Kashkari is a Republican (he was even the Republican nominee for governor of California in 2014), and so he has the right political credentials, the right expertise, and the right monetary-policy views to both make policy more amenable to Trump and be confirmed. Why didn’t it occur to Trump or advisers around Trump to make him the chairman?
I think part of the answer lies in the Kashkari quote I reproduced earlier: “Since I became president of the Federal Reserve Bank of Minneapolis in January 2016, I have advocated against interest rate increases.” In 2016, the president was a Democrat, and Kashkari favored low interest rates. Then a Republican became president, and he still favored low interest rates. His ideological consistency means he would not do what Trump really wants: make policy according to the Republican Party’s interests.
If Moore or Cain had been confirmed to the Fed and then a Democrat got elected president in 2020, it’s easy to imagine them rediscovering their hard-money instincts, asserting that low interest rates would lead to runaway inflation and fighting for rate hikes that would suppress economic growth and impair the Democratic president’s popularity. On the flip side, it is easy to imagine Kashkari becoming Fed chair and then economic conditions changing in such a way that he no longer would favor low interest rates. Perhaps the Kashkari Fed would succeed in reestablishing the credibility of the Fed’s 2 percent inflation target, which it has consistently undershot for years; with inflation increased, Chairman Kashkari might want to raise rates to stop inflation from going even higher, but Trump would surely want rates to stay low even at the cost of too-high inflation.
The Trump presidency should present an opportunity for the Republican Party to rethink its rigid, inflation-phobic, gold-bug-influenced thinking on monetary policy. Trump is currently right about interest rates, even if he is right for the wrong reasons and even if his correct commentary is being offered in a way that damages the Fed’s ability to make good policy in the future. And because Trump is currently right about interest rates, the damaging voices in the GOP that want deflation at all the wrong times are currently quiet.
If anyone in the party is ever going to listen to Kashkari and care about his arguments about why inflation isn’t always bad, now should be the time. He will be back on the FOMC next year. And if Trump is reelected and continues to be annoyed at Jerome Powell, he would be well advised to use his next nomination opportunity in 2021 to elevate Kashkari to the Fed chairmanship.
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