Beginning on January 1, 2018, Minneapolis Federal Reserve Bank President Neel Kashkari will no longer have a seat at the Federal Open Markets Committee. And because Neel Kashkari is a messy bitch who lives for drama, this poses a real problem. Even though he'll still be a regional Fed lumberjack, with all the honors and respect that that entails, Kashkari will lose his seat at the fed-funds rate-setting table, thus losing his principle mode of expression.
So because he's got to savor it while he can, Kashkari is following up his third dissent in as many rate hikes with some bonus dissension. As he's done before, Kashkari on Monday downed a double cortado and fired up his Macbook for a personal essay on Medium, laying out his rationale for zigging when society told him he had to zag. His first line of reasoning should be familiar:
Last week, the Federal Open Market Committee raised interest rates for the third time this year and, also for the third time this year, I voted against that increase. I initially dissented in March because I didn’t see much evidence that inflation was climbing toward the Fed’s 2 percent target and there still seemed to be slack in the labor market. I didn’t see the need to tighten monetary policy.
Same story as before: Core inflation still hasn't hit 2 percent (let alone exceeded it), suggesting the economy has either remaining labor market slack, a self-fulfilling doom-loop of muted inflation expectations, or both. But because this is his last big public FOMC dissent before his gap year, Kashkari had to add another concern to the list. It's time to talk about the yield curve:
These arguments drove me to vote against rate increases in March and June, and the data since those votes have only heightened my concerns. What is new is the flattening yield curve, the difference between 10-year and 2-year Treasury yields, which has fallen from around 1.45 percent before the FOMC started raising rates in late 2015, to approximately 0.51 percent today. An inverted yield curve, where short rates are above long rates, is one of the best signals we have of elevated recession risk and has preceded every single recession in the past 50 years. While the yield curve has not yet inverted, the bond market is telling us that the odds of a recession are increasing and that inflation and interest rates will likely be low in the future. These signals should caution the FOMC against further rate increases until it becomes clear that inflation is actually picking up.
That's right, folks, the yield curve is getting thinner and so is Neel Kashkari's patience. An inverted yield curve is one of the hottest macro predictions for 2018, and Neel is nothing if not a fine connoisseur of market prognostications. In an interview with the WSJ, Kashkari elaborated on his concerns:
“I am concerned about what the bond market is telling us,” Mr. Kashkari said. “All of us around the committee want to avoid prematurely ending the expansion and triggering a future recession, and some people are worried if we wait and inflation pressures build we’ll have to raise rates aggressively, and that could cause a recession,” the official said.
But “it’s also possible we may do it ourselves” through monetary policy that is too aggressive and inverts the yield curve. He said next year’s expected policy path “is becoming a risky situation for the committee.”
Whatever you might think of Kashkari's economic insights, politically this is a great strategy. If a recession happens to roll around next year following the three rate hikes of 2017 and however many the Fed manages to rationalize doing next year, Kashkari can pipe up from his rustic northern lodge and declare a moral victory for the doves. And if the economy continues plugging along without interruption, well, who cares, because Kashkari's got bigger concerns on the mind:
“Historically the Fed has always said distributional outcomes are not the purview of monetary policy -- they are the purview of fiscal policy, and monetary policy only works around the edges,” Kashkari said Monday in an interview. “I actually am concluding it’s the opposite.”
Goodbye Kashkari the Krank, hello Komrade Kashkari. If he hadn't been scheduled to sit out next year we might have seen him go beyond simple FOMC dissents and begin loudly demonstrating for helicopter money on every available occasion. So unless this is all just posturing to increase the public stature of an intensely ambitious politician, it seems Kashkari is going might return in 2019 ready to foment a real revolution in the Fed.
But in 2018 he's going to have to get his kicks somewhere else. And if Kashkari can't satisfy his drama fix in the august halls of the Federal Reserve, he's still got Twitter: