Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, spoke at Yahoo Finance’s All Markets Summit on Oct. 10. Kashkari discussed the Fed's interest rate policy, divisions among members of the FOMC, and his Twitter account.
Below is a transcript of his appearance:
Joining us now, Brian Cheung and Neel Kashkari.
BRIAN CHEUNG: All right, Neel, well, you've worn many hats in your career. You began as an aerospace engineer. You then went on to become an official at the Treasury. You worked at PIMCO, and now you wear a hat as a central banker as the head of the Minneapolis Fed. So let's get started right now. Here are the big headlines that have kind of been demanding, or rather commanding the news so far. The yield curve inverts for the first time since 2007. The New York Fed moves to contain repo markets for the first time first time since 2008. ISM manufacturing numbers, lowest level since 2009. All years that people don't want to hear again. So what is the risk of recession right now? And from your view at the Minneapolis Fed, what do you see as the proper response to that?
NEEL KASHKARI: Sure, well first of all, thanks for having me. I appreciate it. My base case scenario is not a recession. I still think the US economy is going to grow, but the risks have materially increased to the downside. The global economy is slowing. That seems irrefutable. Germany is slowing. Some people think Germany is already in a recession. The yield curve is a signal that I do take seriously. I don't think it's the end-all, be-all of a recession forecast tool, but it's the best tool that we have and it's flashing red. We are seeing businesses pull back in terms of investment. And the US labor market appears to be slowing. That's the bad news. The good news is most Americans still have jobs. Wages are slowly growing. So families have a little more money. They're spending that money. That's 70% of the economy. So still the economy is in a decent place. But the risks absolutely have increased to the downside.
BRIAN CHEUNG: So the Federal Reserve has already cut interest rates twice, once in July, once in September, by 25 basis points each. The board and the Federal Reserve Bank presidents are divided right now about what the next move should be-- should there be more cuts. In your view, if the consumer is still OK, but that there are still some of those downside risks, should there be further accommodation at this time?
NEEL KASHKARI: I think likely — my best estimate right now is that interest rates are roughly around neutral, maybe slightly contractionary. So this is a key concept in monetary policy, is what interest rate neither stimulates the economy nor holds it back. We don't know for sure. We have to try to estimate it. And my best estimate right now is, we're close to neutral or maybe slightly contractionary. If the downside risks have increased, then I think we should be taking measures to try to provide some support to the economy. You know, we raised rates beginning in December 2015 to get ahead of inflation. We raised rates early. The inflation never came. Well, if we were willing to raise rates early for the fear of future inflation, shouldn't we be willing to cut rates in advance of an economic downturn? I think we should. I'm glad that we're easing. I'm not sure how much further we have to go, but I want to watch the data.
BRIAN CHEUNG: So on that point, you were mentioning the idea that maybe the Fed was waiting for inflation or expecting inflation to rise as the labor market got tighter. I mean, keep in mind we're at 3.5% unemployment right now. That's the lowest in over 50 years. But there was a school of thought within the Federal Reserve that that would provide pressure on inflation. What we've seen is that hasn't been the case. It's been pretty much steadily under shooting 2% recently. And that's the whole idea of the non-accelerating inflation, rate of unemployment. I won't get into it right now, but is that a school of thought within the Federal Reserve, that's kind of been put to bed right now?
NEEL KASHKARI: Put to bed is a strong word. I mean, I've probably been the loudest voice within the Federal Reserve arguing I didn't believe the US economy was overheating. I did not believe we were at maximum employment. I don't think the headline unemployment rate of 3.5% is an accurate measure of the health of the labor market. Because that number only includes people who are actively looking for a job.
A lot of people one month will answer the phone, will answer the survey, and they'll say, no, I don't have a job and I'm not looking. The next month, that very same person gets a job. That's not supposed to happen that way. So we do not know how many more Americans are out there who actually want to work. But even me-- so I'm the outlier-- I've been making this argument for three years-- even I believe, at some point, if the labor market really actually does get tight, then that should translate into future inflation. So I'm not ready to completely abandon the Phillips curve, as we call it. But I do think a lot of people say, hey, we're not really at maximum employment yet.
BRIAN CHEUNG: Is there something to be said, though, that inflation is also kind of funny measure too. I mean you were mentioning that unemployment can be kind of a funny measure. But inflation is something that people observe maybe as the price that they pay at the pump or how much food costs when they go to the store. But inflation, as the Fed prefers the measure, is called core Personal Consumption Expenditures. And core PCE strips out energy and food prices. [00:04:30.15] So if the reading right now is that the Fed is under shooting that 2% target, and that that's part of their dual mandate, why isn't maybe that measure as proper as probably it should be.
NEEL KASHKARI: Well, we don't just look at core. We look at headline inflation, headline PCE, as you said it, which includes food and energy, because that's what Americans and consumers experience every day. That's what matters to all of you, so it matters to us. The reason we pay attention to core inflation, it's the best predictor we have of where headline inflation, total inflation will be in the future. So we look at a whole bunch of different measures of inflation. But low inflation is not just an American phenomenon. This is happening in Europe. This is happening in Japan. It's happening in advanced economies all around the world. So the argument that, well, the Fed's just doing a bad job measuring it, well, that means Japan is doing a bad job measuring it. That means Europe is doing a bad job measuring it. Inflation tends to be a global phenomenon. The low inflation is a real challenge for us as central bankers.
BRIAN CHEUNG: So let's go back to what the Fed is doing right now. Again, the Fed cut by 25 basis points in the last meeting, September 18. But five members of the committee saw that maybe they shouldn't have cut interest rates at all in that meeting. And seven telegraphed the possibility of one more rate cut by the end of the year. What they ended up doing was right in the middle. So the Fed is more divided than it's ever been under current Fed Chair Jerome Powell. How difficult is it? How contentious are those meetings? I was talking with Boston Fed President Eric Rosengren this weekend. He was saying sometimes they get contentious, sometimes they get a little heated. What's the discussion like right now?
NEEL KASHKARI: Well, I mean, I love Eric Rosengren. I don't think I've ever seen a FOMC meeting get heated. We're all very respectful. We listen to one another. We are allowed to — before the meeting, each of the participants has two formal interventions, where one intervention is you speak about your view of the economy. The second intervention you speak about your recommendation on policy.
And you can ask in advance, do you want to speak early or do you want to speak late in those go-arounds. I almost always asked to speak late. Why do I do that? Because it gives me a chance to listen my colleagues. And sometimes I push back on them. So maybe Eric said something I disagreed with, and I'll call him out.
BRIAN CHEUNG: Always waiting in the--
NEEL KASHKARI: I always wait. I'd rather go last, because I can respond to them, and then they can't turn around and respond to me. So it's a stronger position to be on. But I think that we're listening to each other. There are a wide range of opinions. I've never seen them be contentious or heated in any way. But they are robust, vigorous discussions, which is what you'd want.
BRIAN CHEUNG: Now at the same time, Federal Reserve Chairman Jerome Powell is the one that has to go up to the podium to explain the decision hours after they make that decision. How difficult is the communication aspect of it? You go out on the road, you sit down here with me and talk to me about what your view is, but when there's so many differing views, how are markets supposed to understand what the Fed's next move is going to be?
NEEL KASHKARI: Well, I actually think it's a real challenge for the chairman to try to represent these diverse views with through his one voice. And I actually think he should just-- I mean, my humble opinion, is, he should just say what he thinks we ought to do. We all have tremendous respect and admiration for Jerome Powell as a policymaker and as our chairman. And if he wants to lead the committee in a direction, I'm quite certain that he'll have the support of the committee to follow him. ] I don't know that I could do a good job representing this diversity of views if I had to sit here and characterize it to all of you. It's much easier for me to just tell you what I think. So I think it'd be easier for the chairman, if he just said what he thinks, instead of trying to represent what me and Eric Rosengren think, when the two of us are on opposite sides of the table.
BRIAN CHEUNG: Do you think he's not doing that right now?
NEEL KASHKARI: I think he believes in consensus. And I think he believes in the committee process. And I do think he wants to try to express the divergence of views, but I think that makes his job somewhat more challenging. I admire him for doing it. But I also think that it's a tough job.
BRIAN CHEUNG: Now another challenge for the Fed chair, but also for Fed speakers at large, is also the pressure from the president, who happens to be tweeting, very often, sometimes about the Federal Reserve. What does that pressure look like from your vantage point? Do you feel that the Federal Reserve should be stronger in terms of pushing back on the president and maintaining the central bank's independence, as it was designed by statute?
NEEL KASHKARI: No, I think we're doing, and Jerome Powell, our chairman, is doing exactly the right thing, which is leading us all to focus on data and analysis and ignore the politics. You know, if we took action just because political leaders asked us to, we would not be doing our jobs. If we resisted them and did the opposite of what they want just because they're asking for it, we would also not be doing our jobs. So the best thing we can do is focus on data and analysis and make the best decisions we can, based on what we think is right for the economy. And that's absolutely what I think my colleagues and I are doing. And that's absolutely what I think Jerome Powell is doing. And I think that's the right thing to do. So we just need to keep doing it.
BRIAN CHEUNG: Is there mind paid to the optics, though, that even though people will be reading the statements from Chairman Powell saying that we are maintaining our independence, that 5, 10, 15 years down the line, people will look back on this chapter in history and say, this was a time that the president was calling for interest rate cuts from the Fed and then the Fed did that.
NEEL KASHKARI: I mean history can take very simplified views if they want to take simplified views on anything. You know, my views-- I'll just speak for myself. My views on this have been completely consistent about the labor market, about inflation. I've been opposed to our rate hikes when President Obama was president and when President Trump was president. So if anybody spends five minutes reading what I've been saying about monetary policy for the last four years, it's clear that it's not politics that's influencing my arguments. If you spend five minutes looking at my colleague's arguments, it will also be clear that it's not politics that's influencing them. And so I think historians will do a little bit more work than hopefully you're giving them credit for.
BRIAN CHEUNG: So let's shift gears then. We've talked about some of the nerdy stuff. We talked about NARU. We talked about the Phillips curve. Let's talk about repo markets, not exactly the sexiest topic. But this is the overnight lending rate that banks and broker dealers will lend to each other at. There was a weird episode that happened about two or three weeks ago, where there was a crunch that saw the rates spike well above the Federal Reserve's then target range of between 2 to 2.5% That's the interest rate that they target. Now the repo markets are basically about the availability of reserves in the system and have a direct link to the Federal Reserve's balance sheet, which they've been shrinking and then stopped, until earlier this summer. What is, in your view, the real underlying problem from that episode that we saw? And what should the Fed's response be to trying to make sure that there is enough liquidity in the system?
NEEL KASHKARI: Well, we knew a couple of things have happened since the financial crisis. The regulators have imposed stronger liquidity requirements on the banks, so they have to have more funding to meet their needs. That's a good thing. It makes the bank safer. And at the same time now, more recently, in the last few years, the Federal Reserve has been shrinking our balance sheet, draining off quantitative easing. At some point, those two things are going to cross each other and there may end up being a scarcity of these reserves or liquidity in the system. But no one knew for sure exactly where that was. Markets have been very focused on this. We have been very focused on this. I think we found we're coming close to the point where reserves are starting to become scarce. So then you saw a spike in rates. And then the New York Fed took the appropriate action of providing more liquidity in the system. You know, this is not about changing the stance of monetary policy. This is just about making sure that markets are functioning. So whatever the Federal Reserve decides to do, it gets transmitted into financial markets and into the economy. So this got a lot of attention in the media. But from our perspective, from my perspective at least, this is just kind of a plumbing issue. The plumbing is flowing again. We know how to do this, not a big deal.
BRIAN CHEUNG: Well, the plumbing still got weird on that Monday to Tuesday, overnight. And there was some criticism that maybe the Federal Reserve should have been more active, if it knew, based on its discussions with banks and broker dealers, that this may happen because of the timing of Treasury tax receipts and whatnot. Did the Fed maybe not do its job in making sure that the liquidity was there?
NEEL KASHKARI: I think market participants-- and we talk to market participants to ask them what their views on are on reserves and what they're going to need-- I think everybody was surprised by this. At the end of the day, its banks' jobs to make sure that they're funding themselves appropriately to meet their needs. So then when banks found that they were short of liquidity, they said, oh, my gosh, where's the Fed to run and comfort us? There's something called the discount window that the Fed provides backstop funding to banks. It's there. It's available to be used. Banks don't like to use it because they fear that it might make them look a little bit weak. So I'm not very sympathetic with a bunch of banks saying, well, you provided me a backstop source of liquidity, but I didn't want to use that one. I need you to provide me another backstop source of liquidity whenever I make a mistake. I'm not sympathetic with that argument.
BRIAN CHEUNG: Well, something that you're also not sympathetic is probably the current level of capital that's required at the banks. It's a different concept than liquidity. You had a plan as the head of the Minneapolis Fed, that proposed a really dramatic increase in the amount of capital that banks are required to hold. Do you think that Congress has done a good enough job to hedge or protect the banks against the next crisis, especially given that there's so many recession indicators kind of flashing right now, that people are starting to think about this?
NEEL KASHKARI: Well, I think the biggest banks-- and our plan focus on the biggest banks, the too big to fail issue — I think the biggest banks are definitely safer than they were in 2006 and 2005. We would argue that they're not safe enough. And it's not the banks that are really at risk, it's the taxpayers that are at risk. So if the biggest banks got into trouble again, they'd have to turn to the taxpayers. Because they don't have enough of their own skin in the game to protect themselves if they make a mistake. So my fear is not for the banks, it's for the taxpayers. But again, I'm not forecasting any kind of crisis like that. I do think the banks are stronger than they were. I'm worried about what happens in 20 years or 30 years, more than I'm worried about what happens next year.
BRIAN CHEUNG: Now the banks would counter that by saying, if we have this capital trapped up, then we won't be able to lend out to the public or won't be able to do the types of economic growth activities that, as the heartbeat of the economy, we need to do. What's your response to that?
NEEL KASHKARI: The biggest banks in America today have much lower capital levels than small banks. It's the opposite of what you would think. A small bank is not going to bring down the US economy, and yet they are more financial resilient than the biggest banks. It's the opposite of the way it should be. And big banks argue that they've got these great economies of scale that the economy benefits from. If big banks really have these great economies of scale that the economy benefits from, they should be able to afford higher capital levels, not lower capital levels. So this is all about their share price. This is all about their earnings and maximizing their profits. And I understand the incentives and why they make the arguments, but the arguments don't stand up to even the most basic level of scrutiny.
BRIAN CHEUNG: And I'd be remiss if I didn't mention that in your role, while you were at the Treasury, you did oversee the TARP funds, the fiscal response to the crisis, where you had to pick winners and losers there. When you look back on that chapter and you think about where the regulatory policies are right now, is there a concern that in the next downturn-- not that you're forecasting one, not that there's one coming, but in the next downturn, the banks will be as ill-equipped or better equipped to handle those potential losses than they were in 2008?
NEEL KASHKARI: Well, I think capital is the best defense against potential losses. And I agree, the biggest banks have more capital than they had in 2006. So that means they will be better equipped to handle losses in a potential downturn. The question for all of us, as taxpayers, is, is it enough? Or are the American people still bearing too much risk? I think the
American people are still bearing too much risk. But that's a political decision that ultimately we have to decide upon.
BRIAN CHEUNG: So lastly, I want to ask-- you are basically the only active person among the Federal Reserve officials on Twitter. Why did you decide to use Twitter as a tool for what can be described as maybe to most people as a more mundane topic of central banking?
NEEL KASHKARI: Well, I think we all, in our own way, at the Federal Reserve are trying to open access to the public, let people see who we are, what we're doing. We're trying to be more transparent. Jay Powell, our chairman, now has press conferences after every FOMC meeting, that's a change.
BRIAN CHEUNG: I wish he had Twitter, though.
NEEL KASHKARI: So this is just a one different way that I'm experimenting with, trying to engage with folks. In finance Twitter, there are a lot of trolls, so I get my share of trolls who come after me, regardless of what I say. I went to Habitat for Humanity and I tweeted that I was installing flooring, laminate flooring at this Habitat for Humanity house. And somebody came out and was criticizing how dare Habitat for Humanity use laminate flooring, it's very low quality. So you're going to get an opinion about everything on Twitter. But for me, it's just kind of a creative way to engage with people. And, you know, it's not only about monetary policy. I tweet about the Cleveland Browns, God help them. I tweet about-- I'm a new dad, so I tweet about my daughter, or my dogs, or fun things to do.
BRIAN CHEUNG: Do you ever face pushback from the Fed, saying hey, you shouldn't be tweeting that kind of stuff?
NEEL KASHKARI: I think nothing that I have tweeted, in terms of the timing-- so sometimes our FOMC meetings end early on Wednesday. It's a Tuesday, Wednesday meeting. And so if they end early, I've been encouraged not to tweet until the statement comes out, because we don't want to give indication that the meeting ended early, because now Neel has his iPhone and is able to tweet again. So when we go into the meetings, all of our electronic devices are left in another room, because we don't want-- we want to make sure that nobody's been able to hack into those devices and then listen in to our conversation. So if you saw me tweeting early on a Wednesday of an FOMC meeting, you would know the FOMC meeting must be over. So I don't do that. BRIAN CHEUNG: All right. Well, we covered a lot of ground. Thanks so much for joining me.
NEEL KASHKARI: Thank you.
BRIAN CHEUNG: Neel Kashkari, head of the Minneapolis Fed, everybody. Thank you.