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Fed's Kashkari wanted stronger commitment to delay rate hikes

Credit: REUTERS/ANN SAPHIR

The Federal Reserve should have adopted more forceful forward guidance to return the U.S. economy to full strength, Minneapolis Fed President Neel Kashkari said on Friday, with a vow to delay interest rate hikes until core inflation had stayed at 2% for roughly a year.

Sept 18 (Reuters) - The Federal Reserve should have adopted more forceful forward guidance to return the U.S. economy to full strength, Minneapolis Fed President Neel Kashkari said on Friday, with a vow to delay interest rate hikes until core inflation had stayed at 2% for roughly a year.

The U.S. central bank earlier this week signaled it would keep interest rates in their current range of 0% to 0.25% until the economy reaches maximum employment, inflation has risen to 2% and is "on track" to modestly exceed that.

But that promise could still mean the Fed could end up raising rates before the economy really reaches full employment, Kashkari said in an essay explaining why he dissented on the policy-setting Federal Open Market Committee's decision.

"I would have preferred the Committee make a stronger commitment to not raising rates until we were certain to have achieved our dual mandate objectives," Kashkari wrote.

The Fed should not tie rate hikes at all to readings of the labor market, which it misread in the aftermath of the last recession and, as a result, ended up stifling the recovery by raising rates too early, he said.

"Not raising rates for roughly a year after core inflation first crosses 2 percent is consistent with a strategy of aiming for a modest overshoot in order to achieve average inflation of 2 percent," Kashkari said.

The Minneapolis Fed president also dissented during the central bank's last round of rate hikes. If the new guidance had been in effect then, he said on Wednesday, the Fed would likely have waited about a year, until January 2017, to lift off from the near-zero level of interest rates, but that would still have left the economy short of full employment, he said.

Dallas Fed President Robert Kaplan cast a second dissent at this week's policy meeting, though for an entirely different reason: he felt the Fed's new promise to keep rates near zero left it with too little flexibility to raise rates if needed.

(Reporting by Ann Saphir Editing by Paul Simao)

((Ann.Saphir@thomsonreuters.com; 415-677-2516; www.twitter.com/annsaphir; Reuters Messaging: ann.saphir.thomsonreuters.com@reuters.net))

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