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How Much Can the Fed Really Influence the Economy?

Federal Reserve BHThe weak April jobs report released by the Bureau of Labor Statistics last week has fueled speculation that a rate hike by the Fed in June is now off the table. But according to the president of one Fed bank, financial markets’ focus is in the wrong place if they are concentrating on what the Fed does with the short-term interest rates.

Neel Kashkari, president of the Minneapolis Fed since November, has mostly focused on an initiative to end “too big to fail” since he took his post. On Monday, Kashkari spoke at the Economic Club of Minnesota and addressed monetary policy for the first time in his six months as president of the Minneapolis Fed.

Kashkari said he believes the “current accommodative policy stance (keeping the federal funds target range at 0.25 to 0.5 percent) is appropriate” given the lack of notable price and wage pressures and the possibility of drawing more people back into the labor market. He also stated, however, “I think market participants are too focused on the Fed, and I am reluctant to draw even more attention to short-term monetary policy decisions, when attention should be focused on solutions to longer-term issues.”

“But the truth is that central banks can’t influence many of the things that really matter to the long-term well-being of a society.”

Neel Kashkari, Minneapolis Fed President

Kashkari compared the market’s preoccupation with “every short-term move the Fed might make” to the Summer of the Shark in 2001, when on the surface it seemed that sharks were biting people more than usual. This prompted television crews to camp out at beaches waiting to catch the next bite on film. There was widespread speculation as to what caused the seemingly higher number of shark attacks, but in the end, it turned out that they were not biting people any more than usual; it was just a slow news summer.

Kashkari

Neel Kashkari

“Given all the attention market participants pay to every FOMC statement, one would think the Fed could control a lot,” Kashkari said. “But the truth is that central banks can’t influence many of the things that really matter to the long-term well-being of a society. We can’t influence trend productivity growth. We can’t influence competitiveness. We can’t influence educational performance.”

Kashkari reminded the audience that central banks can “really do only three things”:

  • Create a long-term stable monetary environment
  • Respond to an economic crisis
  • Influence short-term economic performance

Kashkari noted that the legislative and executive branches of the government have a great deal of influence on the long-term trajectory of the economy, and that Congress determines how much public money is dedicated to educating the workforce. He noted, however, that despite the Fed’s lack of influence on the economy’s long-term trajectory, market participants seem to be focusing on the Fed and what move it will make next as far as interest rates. He speculated that the reason people are paying more attention to the Fed is because of the Fed’s increased transparency and because of fewer policy actions by Congress and the executive branch due to a lack of political consensus in Washington; hence, the “slow news summer” in the shark comparison.

“The Federal Reserve has a role to play, but we shouldn’t be the only player nor the most important one,” Kashkari said.

Click here to read Kaskhari’s complete speech.

About Author: Brian Honea

Brian Honea's writing and editing career spans nearly two decades across many forms of media. He served as sports editor for two suburban newspaper chains in the DFW area and has freelanced for such publications as the Yahoo! Contributor Network, Dallas Home Improvement magazine, and the Dallas Morning News. He has written four non-fiction sports books, the latest of which, The Life of Coach Chuck Curtis, was published by the TCU Press in December 2014. A lifelong Texan, Brian received his master's degree from Amberton University in Garland.
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