Must-Read: Neel Kashkari: Why I Dissented Again

Must-Read: Even if people are unconvinced by Neal Kashkari’s other arguments, I truly do not understand why his risk management argument is not decisively convincing:

Neel Kashkari: Why I Dissented Again: “The economy is sending mixed signals: a tight labor market and weakening inflation…

…For me, deciding whether to raise rates or hold steady came down to a tension between faith and data…. I am inclined to believe in the logic of the Phillips curve…[but] the data aren’t supporting this story, with the FOMC coming up short on its inflation target for many years in a row, and now with core inflation actually falling even as the labor market is tightening. If we base our outlook for inflation on these actual data, we shouldn’t have raised rates this week. Instead, we should have waited to see if the recent drop in inflation is transitory to ensure that we are fulfilling our inflation mandate.

When I’m torn between faith and data, I look at decisions from a risk management perspective. The risk of raising rates too soon is a continuation of the FOMC’s track record of coming up short of our inflation objective…. If inflation expectations drop, as we’ve seen in some other countries (and there are signs it might be happening here in the United States), it can be very challenging to bring them back up. The risk of not moving soon enough generally doesn’t appear to be large…


Brad DeLong


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