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It's Time To Stop Raising Interest Rates, Kashkari Says


Interest rates have been going up - not a lot, but the Federal Reserve has steadily brought up a key interest rate from near zero during the Great Recession. This is normal. As the economy improves, the Fed is supposed to use its influence over interest rates to make money a bit more expensive to borrow for a house or a car to avoid high inflation. The question is how far to go. There is a debate within the Fed, and one voice in that debate is Neel Kashkari, the president of the Federal Reserve Bank of Minneapolis, who says he would like to hold off further rate increases.

Can you just remind people, on the most basic level, what is the one huge lever that the Fed has over interest rates?

NEEL KASHKARI: Well, we move short-term interest rates - overnight interest rates that banks use to trade with each other to affect the trajectory of the economy. And by moving short-term interest rates up and down, longer-term interest rates, such as the rates that you get for a mortgage or that you might pay for a car loan, those end up getting affected by those short-term rates. So we have one tool, but it affects interest rates throughout the economy.

INSKEEP: So when you've taken part in the discussions at the Federal Open Market Committee, which decides these interest rates, is it your impression that people feel that this is a progression of upward steps that is still going, that there are more interest rate hikes in the future?

KASHKARI: That's the current projection. So once a quarter, every three months, we put out a collection of our own estimates of what we think is going to happen to interest rates over the next couple years. Most of my colleagues are forecasting additional interest rate increases. I'm a little bit of an outlier in saying, hey, I think we ought to pause and see how the economy continues to evolve before we continue raising interest rates.

INSKEEP: So when you call for a pause in interest rate increases, are you effectively saying the same thing that President Trump has said when he has been criticizing the Fed's leadership for raising interest rates?

KASHKARI: I think substantively, we're probably saying something similar, though I would argue our styles are somewhat different. I'm not seeing signs that the U.S. economy is overheating. So I don't think we need to pre-emptively raise interest rates.

INSKEEP: Those of us who are laymen out in the economy, do we have to assume that a recession is coming sooner or later and maybe even sooner because the economic recovery has gone on for so long?

KASHKARI: Well, you know, my former colleague and our former chairwoman, Janet Yellen, famously said that economic expansions don't die of old age. So there's no reason that it has to end just because it's been going on for a long time. In fact, one of my concerns is that if we pre-emptively raise interest rates and it's not in fact necessary, we might be the cause of ending the expansion and triggering that recession.

INSKEEP: How did the Fed's decisions on interest rates ultimately affect what the federal government can do and how much the federal government has to pay in interest?

KASHKARI: Well, if we continue raising interest rates, and if we need to because the economy is heating up and if inflation picks up, that will lead to higher borrowing costs for the U.S. government, for the Treasury Department and more debt service. So they have to make interest payments every month on the debt that they've accumulated. As interest rates go up, their interest payments go up. And then that crowds out other things they might want to spend on. So if Congress or the White House want to spend on education or health care or defense, there's going to be less money for that because they have to service the debt. Now, that's up to them. We're not at the Fed. We're not making interest rate decisions to make Treasury's job easier or Congress's job easier.

INSKEEP: But I wonder if there can be a self-destructive spiral here. The federal government increases the deficit through spending or tax cuts. That overheats the economy. You then have to raise interest rates. And suddenly, the federal government is stuck with huge interest rates and all the money they just borrowed.

KASHKARI: That's a very possible long-term outcome. And that's why, in the long term, we absolutely have to get our fiscal house in order. And if you look at other countries, that happens. That happens in Argentina. That happens in other emerging market countries. It's happening to some degree in Italy or in Turkey. So it absolutely can happen. There's no evidence that that's going to happen in America anytime soon. Treasury is still borrowing at very low rates, about 3 1/4 percent for a 10-year loan, from the public. So that's the good news, but we don't know how much longer this can go on.

INSKEEP: Neel Kashkari is president of the Federal Reserve Bank of Minneapolis. Thanks so much.

KASHKARI: Thanks for having me. I appreciate it. Transcript provided by NPR, Copyright NPR.