Neel Kashkari, President of the Minneapolis Federal Reserve, in an interview February 17, 2016.
David Orrell | CNBC
The Federal Reserve failed to raise interest rates during the recovery, part of a policy implementation that failed key signals and threatened to send the economy to recession, Minneapolis Fed president Neel Kashkari told Thursday.
In an unusually harsh reproach of the central bank's measures, Kashkari said that the central bank should not have tightened monetary policy with so little inflation. Instead, he said that the political opening of the federal open market committee should signal that inflation would run higher than the 2% target, a move that would send a clear signal that the Fed is serious about stimulating the economy.
The FOMC hiked awards nine times beginning in December 201
"In my opinion, these interest rate increases were not required by our symmetrical framework," Kashkari said during a speech in Santa Barbara, California.
The comments came as part of a review that the Fed does with the framework and approach It has taken to bring the economy back to life.
They also jibe closely with the feelings of the White House. President Donald Trump has repeatedly criticized interest rate increases and has said the economy would be much stronger if the Fed backed.
While acknowledging the aggressive measures taken by the central bank, he lowered the target rate to almost zero and implemented three rounds of stock purchases that took the $ 4.5 trillion balance – Kashkari said the Fed should have kept its foot on its pedal.
He based his position on a labor market that is still growing, even though wage gains are still tame and inflation averaging around 1.6%.
"With inflation too low and the labor market still showing capacity after 10 years, the only reasonable conclusion I can draw is that monetary policy has been too tight in this recovery," he said.
Kashkari said one of the main problems was that Fed officials did not see how low unemployment could go without generating inflation. The current unemployment rate is 3.6%, the lowest reading in almost 50 years.
"I think we misunderstood the job market and thought we had maximum employment when millions of Americans still wanted to work and fear that if we hit maximum employment, inflation could suddenly accelerate and we would need to increase prices quickly to contain it
"The excess rate has given an erroneous signal," he added.
Even with the low frequency, another meter that includes discouraged employee and those holding part-time positions for economic reasons is still at 7, 3%, reflecting on slack in the job market.
Kashkari said the lesson from the action cycle is that the Fed is likely to be even more aggressive with the policy of the next downturn. feared Fed would continue to raise prices and reduce the balance and aggressively sold.
"Perhaps we would have achieved maximum employment already if monetary policy Ken had been more accommodating, "he said, adding that" by speeding faster than what we required of our symmetrical framework, we ran the risk of overrun and caused a recession. Markets signaled this risk with the sharp decline in bond yields and stock prices last year. FOMC's rapid adjustment to stop further interest rate increases was appropriate, and fortunately, it seems to have reduced this risk for now. "
However, he said he fears what might happen next time if the Fed does not do a better job of listening to financial and market signals.
" In order for today's current framework to be effective and credible, we must go for a walk and actually allow inflation to climb modestly over 2 percent to demonstrate that we're serious about symmetry, "Kashkari said." Make-up strategies like price level targets provide this attractive feature. But we must honestly ask ourselves: If we felt compelled to raise prices when inflation was below target in this recovery, would we really keep prices low when inflation is above target next time? Count me as skeptical. "