Fed’s Kashkari backs sentiment that policymakers can take their time cutting interest rates

Interest rates running at their highest levels in about 23 years are not hurting the economy and could buy policymakers more time before deciding whether to cut, Minneapolis Federal Reserve President Neel Kashkari said Monday.

In an essay released on the central bank’s website, Kashkari said economic developments have shown that Fed policy is not as restrictive on growth as it appears on the surface.

That means the longer-run “neutral” rate, or the level that is neither restrictive nor stimulative, is probably higher than before the Covid-19 pandemic.

In essence, what would appear to be tight monetary policy judging by history over the past 15 years or so no longer looks that way, meaning nominal rates could hold higher for longer without harming the economy.

“This constellation of data suggests to me that the current stance of monetary policy … may not be as tight as we would have assumed given the low neutral rate environment that existed before the pandemic,” Kashkari wrote.

The implications are important as the Fed contemplates when to start, how much it should cut and how quickly should it do so to get back to a neutral setting. Markets have been betting on an aggressive move lower, but recent statements from central bank officials indicate little need to hurry.

“It is possible, at least during the post-pandemic recovery period, that the policy stance that represents neutral has increased,” wrote Kashkari, a nonvoting member of the rate-setting Federal Open Market Committee this year. “The implication of this is that, I believe, it gives the FOMC time to assess upcoming economic data before starting to lower the federal funds rate, with less risk that too-tight policy is going to derail the economic recovery.”

Kashkari’s comments mirror those from Federal Reserve Chair Jerome Powell in recent…