Transformation from über dove to über hawk
An excellent profile of Neel Kashkari, the President of the Minneapolis Fed and voting member this year on the FOMC, explores his thinking on monetary policy.
Source: Getty Images.
Michael Steinberger at the New York Times wrote an excellent piece on the transformation in Neel Kashkari's thinking and the debates at the Fed about inflation.
Extensive interviews with Kashkari and others try to explain how the most vocal dove [focus on maximum employment mandate] before the pandemic is now, after less than two years of high inflation, its most vocal hawk [focus on stable prices mandate].
Here’s one bit:
[Kashkari] cites the Volcker precedent: “While what Volcker did was painful in the moment,” he says, “it paid dividends for decades.” But Kashkari also acknowledges that the cost of curbing inflation will probably fall hardest on the most vulnerable.
“I’m waiting for the crisis to come along where the rich get hurt,” he says.
Severe recessions do not “pay dividends” for workers for decades. What Volcker did was not only painful “in the moment,” it was painful for workers for decades. High inflation is bad, but so slow wage growth at the bottom, which we had for decades.
Speaking of the rich in crises. During the financial crisis in 2008, Kashkari, an official at the U.S. Treasury, oversaw the Troubled Asset Relief Program (TARP), which bailed out banks and other financial institutions, some of which had caused the financial crisis through reckless investments. Let’s be honest. The rich never get hurt.
Who are the hawks helping now?
Fast forward to 2023, and once again, Kashkari is promoting policies from which the rich, with their immense savings, that inflation chips away at, and the shareholders, whose profit margins are squeezed by raises for low-wage workers. The 1% are not going to lose their jobs if the Fed causes a recession. Kashkari won’t either.
My comments that follow his quote above:
Those sentiments haven’t — and won’t — mollify critics who think the Fed is showing callous disregard for the economic welfare of millions of Americans. Claudia Sahm, a former Fed economist, believes that the central bank has raised interest rates much more aggressively than circumstances warrant.
What she finds particularly objectionable is that Fed officials, including Kashkari, claim to be acting in the interest of people on the margins. But in her view, current Fed policy is putting lower-income Americans needlessly at risk. While there is always debate about whether inflation or unemployment is worse, Sahm contends that joblessness is unquestionably more harmful for those at the bottom: “If you are living paycheck to paycheck, yes, higher inflation hurts,” she says, “but no paycheck hurts a lot more.”
Kashkari can choose how he votes; he cannot choose his own reality. It’s time for the hawks to explain why months of slowing inflation and wage growth are not enough to soften their views some about big rate hikes.
Kashkari also cannot choose his own law. Congress gave the Fed a dual mandate: stable prices and maximum employment. The Fed’s credibility as an inflation fighter (proved last year), unobservable inflation expectations, and even the Fed’s independence are not the law of the land. Unelected, unaccountable officials and elite macroeconomists telling us that the best way to have maximum employment is to throw workers out of work is absurd, plus maximum employment is the law.
The Fed is not “woke”
Kashkari is not alone as an über hawk. Larry Summers’ also interviewed for the piece, is the hawkiest of the hawks. Now, Larry has never flip-flopped from dove to hawk, and no one would mistake him for caring about the marginalized workers.
Since last year, Summers said:
In a talk that he gave in October 2021, Larry Summers suggested that the Fed had failed to keep inflation in check because “we have a generation of central bankers who are defining themselves by their ‘wokeness.’ They’re defining themselves by how socially concerned they are.” When I spoke to Summers last fall, he clarified his remarks: He thought it was fine for the Fed to consider inequality and racism in its analyses, but when he made those comments, it seemed to him that the Fed had lost “some of the rigor” that normally guided its policymaking and had perhaps also wavered in its commitment to “doing hard things when necessary.”
The Fed is not woke.
In 2019 the last Black economist out of 400 working in support of monetary policy retired. Also, someone like Summers misusing a model from 1968, the Phillips Curve, to call for a recession has no room to talk about “lost rigor.” And again, the Fed has a dual mandate. Due to systemic racism in our country, the last people to get jobs are often Black and Brown workers. Maximum employment is about getting the last people across the finish line. That’s the law. The Fed’s support in 2021 of the job-full recovery was the Fed abiding by the law, not being radical.
And to be clear, “doing hard things” is not sitting on a beach calling for a recession.
Who sits at the table matters.
The problems with monetary policy go beyond the Fed. Elite white men are the vast majority of the people doing the research that informs policies, deciding on policies, and talking on TV about the “hard things” that workers and families must endure.
Jon Steinsson raised an important disparity in the people working at the top ranks in academic macro. There are stunningly few women.
The diversity of the experts in the profile of Kashkari is not as stark as academia, though only 4 of the 17 cited are women. (We can thank Steinberger for ensuring some diversity.) Furthermore, none of the women work in academia now, while most men work at elite institutions. There is one Black man in the piece.
This is a problem. Americans are not represented at the table, whether it’s by gender, race, Ethnicity, geography, or class. How can we craft the best macroeconomic policy if the advisers do not live in the real world? We can’t, and it is disastrous for people.
Kashkari’s thinking about the economy and monetary policy will have an enormous effect on the lives and livelihoods of Americans and people around the world this year.
It’s an immense responsibility, and I thank him for his public service. Even so, I worry Kashkari is wrong about the need for further big interest rate increases and about who will get hurt by his abrupt transformation from dove to hawk.
If you enjoyed my post, please consider subscribing. And financial support allows me to continue my writing, press, and policy work.
Great commentary and explanations. The Fed Like the Supreme Court has always represented the elite White perspective. We need a new justice movement to change this and the trends do not look good.
Could you comment on how current macro thought and policy is peculiar because it is looking at an economy coming off years of essentially zero interest rates!
We get monetary policy that suits THEM -- it's monetary policy for and by aristocrats.
As for Kashkari's derisive '“I’m waiting for the crisis to come along where the rich get hurt,” he says.' be careful what you wish for: it's called a revolution ...