(Reuters) – Federal Reserve Bank of Minneapolis President Neel Kashkari on Monday said he supported the U.S. central bank’s recent interest rate cut, calling it the “right decision” in light of substantial progress on inflation and the risk of an increase in unemployment.
“The balance of risks has shifted away from higher inflation and toward the risk of a further weakening of the labor market, warranting a lower federal funds rate,” Kashkari said in an essay, referring to the bank-to-bank overnight lending rate that is the Fed’s main policy lever. “Even after that cut, the overall stance of policy remains tight.”
Last week the Fed cut its target range for its policy rate by a half-of-a-percentage point, to 4.75%-5.00%, a bigger-than-usual move that caught many analysts by surprise.
Kashkari is not among the Fed’s 12 voting rate-setters this year, so his view on the recent decision was not previously known. He had until recently been among the more hawkish of Fed policymakers, arguing that Fed policy will likely need to stay tighter for longer to bring down inflation.
In August he had said he was open to a rate cut, but indicated his preference for a smaller rate cut unless there was a quick deterioration in the labor market.
Monday’s essay shows his views are now in synch with the bulk of his fellow Fed policymakers, and includes a chart that indicates he, like them, feels they will probably need to reduce the policy rate by another half-of-a-percentage point over the central bank’s final two meetings of the year.
The chart also indicates he projects a further full percentage point reduction in the policy rate over the course of next year, to 3.4%.
That would put the policy rate just a half-a-percentage point above what he now sees as the “neutral” rate at which borrowing costs neither bolster nor brake a healthy economy.
The actual path, though, he said will depend on the incoming data.
Inflation by the Fed’s preferred measure has dropped to 2.5%, a level that does not indicate victory in the inflation fight but does mark substantial progress, he said.
The trend in recent months show “the disinflationary process appears to be on track,” he said, with little evidence inflation could surprise to the upside ahead.
The labor market meanwhile has softened, he said, with the unemployment rate at a still-low 4.2% but up from last year, and other data on labor conditions showing a slowdown.
Even so, he said, consumer spending and economic growth has been surprisingly resilient, a “confusing” mix of data that he said does not suggest recessionary pressures are building.
(Reporting by Ann Saphir; Editing by Chris Reese)
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