The lone member of the Federal Reserve to vote against Wednesday’s decision to raise interest rates explained Friday that he did so because he decided to rely on data rather than faith in economic theory.
“Deciding whether to raise rates or hold steady came down to a tension between faith and data,” recounted Federal Reserve Bank of Minneapolis President Neel Kashkari, writing on the publishing platform Medium.
Uniquely for a Fed official, Kashkari explained his monetary policy decisions in a lengthy essay, complete with charts showing the economic data he relies on.
Ultimately, he explained, he needed more data clearly showing that inflation will rise in the months and years ahead. He was not willing to rely on “faith” that inflation will rise to the Fed’s 2 percent target just because the unemployment rate has fallen to a very low 4.3 percent in recent months.
Fed Chairwoman Janet Yellen reached the opposite conclusion. In a press conference following Wednesday’s announcement, she said that the jobs market is hot any way you look at it, making it a “prudent move” to raise rates even though inflation has slowed.
Inflation fell to 1.7 percent in the latest reading of the gauge preferred by Fed officials. The operating theory at the central bank is that low unemployment should eventually translate into higher inflation, partly because employers will have to raise wages as workers become harder to find.
But Kashkari expressed concern that relying on that theory could mean raising rates too soon, leaving some workers on the sidelines who otherwise could have found jobs in a tighter labor market.
And if he’s wrong and keeping rates low sparks too-high inflation, he said, he is confident the Fed could manage that.
