Lee Schafer
See more of the story

“My approach hasn’t changed,” Minneapolis Federal Reserve Bank President Neel Kashkari said last week. “The data has changed.”

Kashkari spent much of last year as a sometimes lonely voice at the Fed opposing the idea that short-term interest rates should go up. While he’s not exactly on board now with boosting them, a lot has changed since his last no vote. That was only last December.

Since then Congress has passed a massive fiscal stimulus that should bump short-term growth, in the form of a big tax cut to be largely paid for with borrowed money. There’s been new inflation data, too, which Kashkari pays particularly close attention to. Inflation appears to finally be inching up to the Federal Reserve’s target of 2 percent per year, though it remains puzzling why wage growth has been so anemic with an unemployment rate as low as it’s been in nearly two decades.

If there’s a clear takeaway from a conversation with Kashkari, it’s that there isn’t always a tidy story told by the data, even to Fed officials.

Kashkari remains a high-profile spokesman for the Fed on all sorts of things, even though this year he doesn’t have a formal vote on the policymaking council called the Federal Open Market Committee.

It’s this committee that decides whether to throw the main policy lever the Fed has, by setting a new target for short-term interest rates. Move too fast in moving them up, and economic growth could sputter. Move too slow and inflation could overshoot the 2 percent target and maybe even keep rising.

The privilege of voting gets rotated among presidents of the regional Federal Reserve Banks around the country, one of the peculiarities of a central bank created by Americans a little suspicious of central banks. Yet the style of the Fed’s decisionmaking is to have all its presidents and Fed governors sit at the same table to work through what to do before a formal vote is taken.

Blogging his thinking

Kashkari drew a lot of attention last year by three times voting against the consensus to raise short-term interest rates, although Chicago Fed President Charles Evans joined him the last time with a thumb’s down.

After each vote, Kashkari took to the blogging site Medium to explain, not exactly an old-school thing for a Fed bank president to do. For years, he said last week, people at the Fed seemed sure the inflation rate would pick up. And while the unemployment rate kept slipping, the economy somehow kept producing new jobs, so how could anyone be sure the economy was nearing maximum employment?

“For the first half of last year the inflation rate was actually going down,” he said. “I just said look, let’s just wait, we can always raise rates later if we need to.”

One reason Kashkari cares a lot about inflation is because fostering stable prices is one of the Fed’s main jobs, along with maximizing employment. While both seem to make a lot of sense as goals, achieving them at the same time is no easy trick. Generally when the unemployment rate declines — which is great — the inflation rate ticks up.

Runaway inflation hasn’t been a worry in a long time, however, and lately the hope is that the rate increases. With that inflation target now clearly in sight, he said, “that suggests it would be appropriate to normalize monetary policy” and let interest rates increase.

“But now and then, the big question is what is normal,” he added. “And this is a complicated topic.”

One of the things he was referring to is what economists call the natural rate of interest, a Goldilocks-level of just-right interest rates where the economy is operating more or less at its potential. Around the Fed, they haven’t all agreed on a precise number for it, just that it’s a lot lower than it used to be.

There’s not necessarily a consensus view, either, on why wages haven’t surged as the unemployment rate slipped from its double-digit peak after the Great Recession to bounce along about 4 percent nationally and closer to 3 percent here in Minnesota.

And what Kashkari hears “everywhere I go in the district” is all about a labor shortage, he said, speaking of his territory that stretches from Montana east through Minnesota and into parts of northern Wisconsin and Michigan.

Employers usually explain that they simply can’t raise wages, he said, as customers wouldn’t pay higher prices to cover any labor cost increases.

His theory here is that expectations of wage increases just got anchored near zero. This thinking of employers reminded him a little of what happened in Japan, where a whole generation of people came to believe that in their no-growth economy, wages just never increased. Here it was the trauma the Great Recession and what followed that affected thinking.

‘Positive for society’

He’s been encouraged by recent signs of increased effort by employers to provide more training or maybe expand the labor pool by bringing aboard workers with criminal backgrounds, “and that’s unquestionably positive for society,” he said.

Another puzzling thing about the labor market is who’s actually in it. The government tries to answer that question with surveys, in which workers self-report whether they have a job or are actively looking for one.

So in January, somebody might have shrugged and replied on the survey that he or she is permanently retired, and so gotten excluded from the unemployment calculation altogether. One month later, the same person might have reported working, and it’s not supposed to happen that way.

“This is an art, it’s not an exact science,” Kashkari said of making monetary policy. “And we’ve got lots of different signals and we are trying to figure which ones are most important.”

So what’s happening in our economy remains a fascinating story. And as always, we have no way of knowing how the present chapter is going to end.

lee.schafer@startribune.com 612-673-4302