Federal Reserve Bank of Minneapolis President Neel Kashkari said Monday the Fed's aggressive interest rate hikes over the last two years do not appear to have slammed the brakes on the economy too hard, so it can take its time before starting to cut them.
Because monetary policy does not appear to be overly constrictive, it gives the Fed "time to assess upcoming economic data before starting to lower the federal funds rate, with less risk that too-tight policy is going to derail the economic recovery," he wrote in an essay published on the Minneapolis Fed's website.
It is one of several essays Kashkari has written over the last couple of years to explain his thinking about inflation, monetary policy and the economy.
Kashkari does not have a vote this year on the Fed's rate-setting committee as he did last year, but he still takes part in the policy debate at every meeting.
After a series of interest rate increases to rein in high inflation, Fed policymakers have indicated they plan to start lowering rates this year now that inflation has slowed back down. The question is when. Last week, Fed Chair Jerome Powell said it is unlikely the committee will cut rates at its next meeting in March.
In a "60 Minutes" interview that aired Sunday evening, Powell also said officials can be careful and not rush to cut rates because of the strength in the economy. Stocks fell this morning in response.
To back up the argument, Kashkari pointed out some of the more interest rate-sensitive sectors such as housing are not seeing significant weaknesses as one might expect with higher rates. While home sales are down and home price growth has slowed, he also noted that construction employment has climbed to all-time highs and home prices are still high by historical measures.
At the same time, consumer spending has remained surprisingly strong, too.
"These data lead me to question how much downward pressure monetary policy is currently placing on demand," he wrote.
Still, he pointed to some areas of concern such as auto loan and credit card delinquencies being on the rise and weakness in the office sector of commercial real estate.
If monetary policy were the main reason for falling inflation, it would have been accompanied by weak economic growth and a weakening labor market. Instead, economic growth as proven to be "remarkably resilient" and unemployment has remained quite low, Kashkari wrote.
Rather, it appears that inflation has been coming down mostly because supply chains have been healed and labor supply has bounced back, he said.
Still, he added that monetary policy has played an important role in keeping long-run inflation expectations in check.
"It is hard to overstate how important that is for ultimately achieving the soft landing we are all aiming for," he wrote.
Kashkari will share more about thoughts on the economy at a number of public appearances in the coming weeks, including at a luncheon in Mankato on Tuesday.