The president of the Federal Reserve Bank of Minneapolis, Neel Kashkari, on Monday expressed his support for the latest interest rate cut by the US central bank, calling it the right decision given the great progress in controlling inflation and the risk of rising unemployment.
"The balance of risks has now shifted from higher inflation to the risk of further labor market weakness, which calls for lower interest rates," Kashkari said in a note, referring to the overnight interbank lending rate that is the Fed's main policy tool. "Even after the reduction, the overall policy position remains tight."
Last week, the Fed cut its target range for interest rates by half a percentage point, to 4.75%-5.00%, a bigger-than-usual move that surprised many analysts.
Kashkari is not one of the Fed's 12 rate-setters this year, so his views on recent decisions are not previously known. Until recently, he was one of the Fed's more hawkish policymakers, arguing that Fed policy may need to remain tighter for a longer period to bring down inflation.
In August, he said he was open to interest rate cuts, but expressed his preference for smaller rate cuts unless there was a rapid downturn in the labor market.
Essay on Monday showed his views are now in line with most other Fed policymakers, including a chart showing him, feeling they may need to cut interest rates again by half a percentage point in the central bank's last two meetings of the year.
The chart also shows he predicts another full percentage point reduction in interest rates over the next year, to 3.4%.
This would put the base rate just half a percent above the "neutral" rate, which he sees as the rate at which borrowing costs do not encourage or hinder healthy economic growth.
Inflation based on the Fed's preferred measure has fallen to 2.5%, a level that does not yet indicate a victory in the effort to control inflation but marks significant progress, he said. Trends in recent months show "the process of disinflation seems to be going well," he added, with little evidence that inflation will jump higher.
Meanwhile, the labor market has weakened, with the unemployment rate at 4.2%, still low but up from last year, and other data on labor conditions showing a slowdown. Even so, he said, consumer spending and economic growth remained more resilient than expected, a mix of data that was "confusing" and did not indicate recessionary pressures were taking place.
