A look inside an FOMC member’s mind

Why I Dissented Again

This is a great read by Fed President Neel Kashkari on how he looks at monetary policy.

I must admit, I was surprised to see anyone dissented last week, but it does not surprise me that Kashkari was the lone dissenter. That said, it sounds like his vote against tightening monetary policy is due to risk management; which is commendable. In his view, there is very little risk in not raising rates. There is some truth to this. For instance, the worst thing that can happen if you do not raise rates is inflation doubles overnight. This would be a statistical anomaly and likely not reflective of reality. On the other hand, by raising rates the risk is steamrolling employment growth and causing disinflation. Of the two, I would rather take my chances with the former.

I did focus on a couple of points in the article. The first is a notion I mentioned last week regarding the price of oil. Energy as a whole is included in the headline inflation number but typically not included for detailed analysis because the volatility of the price of energy can cause large swings. However, the one factor not considered by Kashkari is that energy – particularly oil – is included in the cost structure of just about everything we purchase as just about every good uses some form of oil. Thus, the decline in oil prices in recent years has a meaningful impact on the price of consumer goods (which make up core inflation). To truly measure the level of inflation, we would need to remove oil from the value chain equation; which is logistically not possible. But this is important to note because the decline in energy prices has been a drag on core inflation over the last couple of years.

The second point I focused in on was Kashkari’s labor cost paragraph. Labor costs are important because as the price of labor increases, businesses will pass these costs (well, depending on the type of good, some of the costs) to the consumer. Thus, as labor costs increase or decrease you can anticipate inflation or disinflation, respectively. Kashkari mentions that there is not a clear trend in labor costs. I disagree with this as there is a clear upward trend over the last 2-3 years (as you can see below). I’ve used a similar chart a few times before to explain why I believe inflation is right around the corner. We just need to be patient.

labor costs - kashkari

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