Federal Reserve

Fed's Kashkari: Rate hike pause keeps US growth on track

Key Points
  • The Federal Reserve's decision to stop raising interest rates puts a "fundamentally healthy" U.S. economy on track to further growth, Minneapolis Federal Reserve Bank President Neel Kashkari suggested.
  • Last week, the Fed discarded a promise to keep raising rates, and instead pledged patience on further policy change.
  • The dovish shift was cheered by financial markets, but sounded to some analysts like a warning of economic weakness ahead.

The Federal Reserve's decision to stop raising interest rates puts a "fundamentally healthy" U.S. economy on track to further growth, Minneapolis Federal Reserve Bank President Neel Kashkari suggested on Sunday.

"I think we still have room to run in the U.S. economy," Kashkari said at a town hall at a church in Long Lake, Minnesota.

"The U.S. economy is fundamentally healthy," he added. The event was closed, but an audio recording was distributed afterward.

"We at the Fed cannot control if Europe has a crisis, or if China has a hard landing, but we can control our own mistakes; so if we can avoid tapping the brakes prematurely, I think the expansion can continue."

Neel Kashkari, president of the Federal Reserve Bank of Minneapolis
Chris Goodney | Bloomberg | Getty Images

Last week, the Fed discarded a promise to keep raising rates, and instead pledged patience on further policy change. The dovish shift was cheered by financial markets, but sounded to some analysts like a warning of economic weakness ahead.

The decision also appeared to deliver President Donald Trump what he had been demanding in tweets and interviews for the past several months - a stop to what he termed the Fed's "crazy" round of interest rate hikes that in his view were undercutting the growth he has sought to foster.

The Fed has been raising rates since December 2015, including four times last year, to a current range of 2.25 percent to 2.5 percent.

Kashkari's comments put a positive spin on last week's decision.

"I think there are more people out there who want to work; let's let the economy continue to strengthen and if we see signs then, wages pick up, inflation picks up, we can always tap the brakes then; let's just not tap the brakes prematurely," Kashkari said.

It is a view Kashkari has staked out repeatedly over the past couple of years, but only recently has it been adopted by his policy-setting colleagues.

There are some risks, including slowing growth in China and confusion surrounding Britain's exit from the European Union, he said. Optimism fueled early last year by Trump's hefty tax cuts has eroded amid mounting concern over trade tariffs, Kashkari said, keeping some businesses from making investments.

Still, he said, the U.S. economic outlook was strong. As long as there are no signs the economy is overheating, he said, the Fed should not risk pushing short-term rates above long-term ones, creating a so-called inverted yield curve that would herald a recession.

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Key Points
  • About 90 S&P 500 companies report earnings in the week ahead, including Alphabet, Disney and Eli Lily.
  • Investors will watch those releases and economic reports, like ISM non-manufacturing, for any signs of how much the economy is slowing.
  • January's strong jobs report, with 304,000 non-farm payrolls added, has removed some fears that a recession is coming.
  • "The tug of war that you saw in the market, that was going on in the last half of last year is playing out in the data. Some of the data is a bit lower, but some of the economic surprises are picking up to the upside rather than downside," said one strategist.