A Conversation With Neel Kashkari

Neel Kashkari discusses U.S. economic growth, monetary policy, and the Federal Reserve Bank of Minneapolis.

The C. Peter McColough Series on International Economics brings the world's foremost economic policymakers and scholars to address members on current topics in international economics and U.S. monetary policy. This meeting series is presented by the Maurice R. Greenberg Center for Geoeconomic Studies.

LIESMAN: I am very pleased to be here with Neel Kashkari, the president of the Minneapolis Federal Reserve Bank. And this is the C. Peter McColough Series on International Economics. I think that takes care of all the business we have to do. Neel, thanks for being here.

And thanks to the Council on Foreign Relations for hosting this and inviting me to preside.

Neel, this morning the Dow Jones futures are up three points on optimism that there could be some form of a trade deal. If that happens, are you going to withdraw your—(chuckles)—your desire to cut interest rates?

KASHKARI: First of all (laughter)—

LIESMAN: You can do it right now.

KASHKARI: Let’s see what happens. We’ve been—I’ve been very consistent for the last three, almost four years now that we keep coming underneath our inflation target. We have a goal of 2 percent, we keep coming up short. We’ve averaged 1.6 percent for basically the last ten years and we keep being surprised that there’s more slack in the labor market. Even though the unemployment rate if 3.5 percent, wage growth is still tepid. If we were really running out of workers, you would expect to see wages picking up as businesses compete for those few workers that are left. So in my view, we’re still in the free-lunch zone between the labor market and inflation. So I don’t see why we should be tapping the brakes on the economy.

So the bottom line is let’s see how the data unfolds, let’s see what really happens. But that would be an important consideration because a lot of businesses that I meet with say they’re worried about trade and they’re worried about tariffs. If the country could lift that fog, I think that would be good for the economy.

LIESMAN: Talk to me about how you process the trade wars and tariffs. Are they inflationary or are they deflationary?

And then I think an important question to tag onto that is, why does cutting rates alleviate the effects of the trade war?

KASHKARI: So I think the effect of the trade war on the economy is complicated. In terms of inflation, if you just think of somebody imposing tariffs, that would be a one-time price adjustment and we can model it out and that if the prices go up you would say that’s inflationary, but it’s actually a one-time resetting of prices. It doesn’t necessarily lead to higher and increasing prices going forward. That’s easy to measure and easy to model.

The really hard part is the effect on psychology. If a lot of businesses are worried about tariffs and trade, they don’t know where the uncertainty is, then they pull back. That could be disinflationary if everybody pulls back at the same time. That’s the much bigger potential effect, but that’s also the effect that we basically don’t know how to model. We can’t model the shock to psychology and how that’s going to ripple through the economy.

And then lastly, why does—why is monetary policy the right tool to respond? It’s not the right tool to respond. It’s a very poor tool to respond to this kind of anxiety and uncertainty, but it’s the one tool that we have. And the Federal Reserve’s job, our dual mandate, is to achieve stable prices and maximum employment, given the tools that we have. And the tools that we have are monetary policy.

LIESMAN: I have some questions about the use of monetary policy when it comes to trade wars. And I want to tell you my thinking on this thing, which is, one of the things the Fed does is it counters the kind of mob psychology on the negative side. It says you guys are—there’s an assessment the Fed makes, which is, you guys are wrong to be so pessimistic and drive down either investment, capital demand—aggregate demand or I guess capex and aggregate demand down below this sort of level where it should be. And we’re going to cut rates and incentivize you to go back and take more risk.

But what if there really is risk in this situation and what you’re doing is cutting interest rates and driving people to take risks in a place where they’re going to lose money? In other words, if you have a trade war and you end up reducing overall potential growth, then is it right to cut rates and incentivize people to take risk in that context?

KASHKARI: Well, I think the question then becomes, what rate is neutral? And this is a constant debate we have. It’s fundamental to central banking. What rate balances investment and saving in the economy. We don’t know for sure. We have to try to estimate it. Our best estimates are the neutral rate has gone down over time. Why has it gone down? Societies are aging, older people tend to save more. Where the big demand for capital? So you have more savings, less investment, relatively speaking.

If there was a trade war that just increased risk, that balance would probably continue in that direction, right? People would save more, there would be—

LIESMAN: Lowering the neutral rate.

KASHKARI: Lowering the neutral rate further, which would suggest that interest rates should be even lower to balance out savings and investment in the economy. So I think it might actually work the opposite direction.

LIESMAN: You have said that you think the Fed is slightly contractionary. How do you arrive at that?

KASHKARI: Well, again, this is an inexact science. If you look at where real rates are today—say, five year forward or ten year forward—and you look at inflation, it seems like the neutral rate is around zero. And if you take the federal funds rate of 175 and you subtract off inflation of around 175, you get to around zero.

Another little proxy, the federal funds rate is currently about the ten-year Treasury. That’s an art, not a science, but it speaks to the inverted-yield curve. I mean, why does a yield curve—why does an inverted yield curve lead to a recession? Does it cause a recession? We don’t know, but it is a reflection on the stance of monetary policy.

So if we raise the federal funds rate, we move the front end up, the back end’s not moving, we invert the yield curve, that, to me, is giving me some information that monetary policy is tight relative to neutral.

LIESMAN: Why then doesn’t the Fed specifically target the yield curve?

KASHKARI: Well, I think that’s an interesting idea. And I think—

LIESMAN: It’s not mine. I thank you for that, but it’s not my idea. (Laughter.)

KASHKARI: I understand that. I understand that. And the Bank of Japan is doing this. And I think that this is—you know, our traditional policy tool is moving the federal funds rate up and down. We used quantitative easing and forward guidance in the great recession to provide more stimulus. I actually think it’s worthy analyzing the potential of yield curve control as yet another policy tool.

Japan is doing it across the whole spectrum, zero to ten. I don’t know that we would need to go out to ten. Even if we tried to control the first couple of year of the yield curve, that could be another tool in the Fed’s arsenal. It’s complicated, it’s not without risk, but I think it’s interesting and worthy studying.

LIESMAN: Neel, allow me to just comment that “the Bank of Japan is doing it” is not the best recommendation you could possibly give to a monetary policy. (Laughter.) But that’s just my editorial insertion right there.

KASHKARI: Well, in defense of Japan, it’s interesting. Japan has overall slow economic growth, but per worker they’re growing just as fast as America. And so Japan’s biggest problem is a demographic problem. And, you know, is monetary policy the right tool to address a demographic problem? Probably not.

LIESMAN: I did want to push back a little bit on inflation only because there seemed to be separate views on this, 1.6, 1.7 on a 2 percent goal and a twenty-one-trillion-dollar economy, you’re not really missing by that much. Why is missing by three-tenths or four-tenths a cause or a call for action on monetary policy?

KASHKARI: If we were missing sometimes to the downside by three or four-tenths and sometimes to the upside by three or four-tenths, I would agree with you. But when we’ve said we have a symmetric inflation target, so inflation could be a little bit above or a little bit below—it’s not a ceiling, officially it’s not a ceiling—and we miss below for ten years in a row, right, we’re doing something wrong and we need to address that.

LIESMAN: And what is it you’re doing wrong and how will lower rates address that inflation issue?

KASHKARI: I think we’ve done a couple of things. One is I think we’ve misread the labor market. Even I, I’ve been probably the most dovish, even I have been surprised how many more Americans out there it turned out wanted to work, and we don’t know how many more are yet out there because that headline unemployment rate only includes people actively looking for work. It turns out there’s this shadow supply of labor that we didn’t really understand. So there may be more slack than we appreciate.

And number two, we keep signaling that rate increases are going to go up—rates are going to go up, rates are going to go up. If you look at the dot plot, which we’ve published for the last, I don’t know, eight years or so, these projections of where interest rates are going, they’re always up and relatively quickly, much quicker than in fact has been called for. So the forward guidance that we’ve been offering has been hawkish forward guidance it turns out. That’s actually a contractionary effect that we’ve been having on the economy.

So I think we—you know, this—these are minor adjustments. But I think if we had a more accommodative policy stance, I think we would have seen us get closer to our inflation target.

LIESMAN: So just everybody knows the background for the question I’m about to ask now is there’s a broader unemployment gauge called the U6, which I bet 90 percent of the people in this room, but I’m just going to do for the—it includes people who have dropped out of the workforce. And while the current unemployment rate, which is the headline rate, is 3 ½ (percent), the U6 is 6.9 (percent). Did I get—did I get that right, something like that?

KASHKARI: I think that’s right.

LIESMAN: Should the Fed be targeting the U6, the broader unemployment rate, as the better gauge for whether or not you’re delivering maximum employment?

KASHKARI: I think we all look at the headline, we look at U6, we look at a wide range of numbers. The most valuable number to me is wage growth. I mean, we’re trying to assess supply and demand in a market. And if you want to assess supply and demand in a market, start by looking at the price. The price of labor is wage growth. And wage growth right now is around 2.9 percent; net of productivity is it still undershooting our 2 percent target or around 2 percent target.

LIESMAN: Explain that line of thinking about linking wage growth with productivity.

KASHKARI: So you would expect, all things being equal kind of in a steady-state economy, the wages to grow with inflation plus productivity growth. And if productivity grows faster, than you can have more income growth to workers that’s noninflationary. If productivity is not growing and wages are growing faster, then that’ll end up being inflationary for the economy.

So if you just look at where productivity is, productivity has picked up in the last year or two, and you look at where inflation is, wages are not growing at a fast rate suggesting that there’s high inflation to come in the future. So that, to me, is a first test of, are we really at maximum employment?

What does maximum employment mean? For the Fed, it means that if we go beyond this point in the labor market, we’re going to get inflation above 2 percent. Those are the goals that we’re trying to achieve. I see no evidence that we’re there yet.

LIESMAN: So I’m going to do the math so people in the audience don’t have to. If I do 1.6 (percent) inflation, give me a number for productivity, 1 ¼?

KASHKARI: 1.2, 1.3 (percent), yeah.

LIESMAN: 1.2 (percent), OK, so that’s 2.8 (percent).

KASHKARI: 2.9 (percent).

LIESMAN: 2.9 (percent). Wage growth of 2.9 (percent) you would not consider to be inflation. I’m going to get paid the increase of my productivity—in other words, I’m more efficient, give me more money because I’m more efficient—and you’re going to give me—because your prices are rising as a—as a seller, you’re going to give the employees that amount. So is it 3, 4 percent would not give you concern if you had wage growth in that level?

KASHKARI: If we had 3 ½, 4 percent wage growth, I would say OK, we’re probably at maximum employment and we now need to—that would imply, through the economic models, that higher inflation is likely to come. And that means that’s probably going to boost our—boost us back up to target. Hey, now we need to take this seriously, maybe we’re there yet, maybe we need to fine tune things.

But the fact is not only is wage growth not above the level that would imply higher inflation, it’s been falling in the last six months. So the big—one big concern I have right now is the labor market shows signs of softening. Payroll growth is still reasonable, but it’s quite a bit lower than it was a couple of years ago. And now we have evidence that wage growth is softening. These are not signs of firming; these are signs of softening.

LIESMAN: I guess my role here is to be the skeptic on this, so I’ll push back. Everybody said, you know what? We’re still at—what was the number on—the Friday, one hundred thirty-five thousand—running job growth above the entrance to the workforce.

KASHKARI: Correct.

LIESMAN: Why can’t we just—

KASHKARI: Only a little bit.

LIESMAN: Only a little bit, right? It depends on where we put that number. But why can’t we just slow a little bit? Why can’t we have the unemployment rate go from 3 ½ (percent) back up to a more manageable 4 percent? It would be kind of nice, right? We’d have a nice, soft landing.

KASHKARI: Well, that’s what I think everybody would love to have is a soft landing. We’ve had reasonable growth for ten years, kind of land the plane gently. It’s just never happened, right? Literally, when the unemployment rates goes up half a percent, it usually goes up 1 ½ percent or 2 percent or more and so that’s the thing.

And there’s no evidence—our chairman, Jerome Powell, has been saying this quite a bit lately—there’s no evidence that the labor market is overheating. In testimony in June, he said to call something hot, you have to see some heat and heat is wage growth in the labor market. And so, why would we tap the brakes on something that isn’t even hot and run the risk of a hard landing?

LIESMAN: It sounds like you’re sort of unequivocally saying that the four rate hikes last year was a mistake.

KASHKARI: Well, I mean, I dissented. You know, we rotate on when we get to vote. So I was dissenting against the rate increases; the three rate increases we did in 2017, I dissented against all three of those just because I thought we were missing on both.

Look, our dual mandate—stable prices, 2 percent inflation, and maximum employment—are supposed to be like a see-saw where there’s a tradeoff between them. We’ve been in the free-lunch zone where there’s no tradeoff. There’s still slack in the labor market, we’re undershooting our inflation target. So if you’re still in the free-lunch zone, why are you cooling off the economy?

LIESMAN: OK. So there’s not supposed to be a free lunch, right? I don’t know. I, you know, didn’t pay all that much attention in college economics, but that was, like, the one thing I remember. Yeah, I probably should have paid more attention, that’s true. (Laughter.)

All right. But the thing is that the free lunch may—we may be paying through additional financial risk in the economy. Some of your colleagues on the Federal Reserve Open Market Committee are very concerned about this that they see a reach for yield and they see investment into things that probably shouldn’t be happening.

Do you not have any concern at all about when you keep yields low and people are trying to find ways to get the returns that they need for either their retirement or for pensions or whatever that you’re forcing them into and creating bubbles in the economy?

KASHKARI: Well, I do have concern, but it’s a very complicated issue and we have to use the right tool for the right problem. I mean, the right tool to address financial stability concerns, for example, is our countercyclical capital buffer for the biggest banks, make sure the biggest banks have enough capital to withstand potential corrections. So I’m in favor of that.

But the idea that we should raise interest rates to tamp down the stock market or investments in things like WeWork, I don’t think that that makes sense. I’ll give you an example. In 1996, you all remember, Alan Greenspan declared we have “irrational exuberance” in the stock market. And then the stock market climbed for the next four years until the tech bubble burst. If the—and by the way, the recession that followed the tech burst was pretty mild. It was a short, mild recession.

If Greenspan had raised rates beginning in ’96 to put a lid on the stock market, he would have had to raise rates so dramatically. That would have been far more damaging to the economy than the recession that actually followed. So it’s just monetary policy is the wrong tool.

And then the last thing—sorry, this is a long answer.

LIESMAN: Go for it.

KASHKARI: The last thing I’ll say is, the difference of reaching for yield and repricing assets on a lower neutral interest rate environment, it’s very hard to tell the difference. So neutral rates have been falling around the world for forty years. And so if you take the same cashflows and you now discount them at a lower neutral rate, you’re going to get a higher price. Is that reaching for yield or is that repricing a lower interest rate environment? Hare to tell.

LIESMAN: Is there a certain asymmetry, though, in your answer? The Fed has used policy to increase stock market and stock market wealth. It was a big part of the response in the financial crisis, what they called portfolio rebalancing, which was another name for goosing the stock market. But you’re unwilling to say that’s part of the process on the other side.

KASHKARI: I don’t think so. I mean, I think if—I go back to our dual-mandate goals. If inflation was above our 2 percent and been running above 2 percent, then I think you’d say yeah, it’s appropriate to bring it back down and one of the channels to bring it back down might be through the asset prices that you’re talking about.

But when for ten years we’ve been undershooting our inflation target and there appears to still be slack in the labor market, that’s our prime directive. Our prime directive are achieving these two goals over the—over the, you know, an economic cycle, try to achieve those two. We’ve been missing on both of them.

LIESMAN: There’s a meeting coming up. You have expressed preference for cutting rates by fifty basis points. Is that still your preference?

KASHKARI: That was my preference the last few months because I wanted to do a shock, I wanted to say we’re going to get ahead of this. Inflation expectations are falling, inflation is running low, I wanted to get ahead of that and say we’re really committed to getting inflation back to our 2 percent.

We’ve now done a couple of cuts, so I think the moment to provide that shock has passed. So I’m probably going to be in favor of—if the committee chooses to move ahead with a cut at the next meeting, I will probably be in favor of that. Whether more cuts have to come beyond that, I don’t know, we’ll have to see how the data evolves and how the trade dispute either solves or continues.

LIESMAN: But there is some sense that when you’re close to the zero lower bound—and I guess “close” is a relative term—but you got, what, eight quarter-point cuts left or something along those lines—

KASHKARI: Yeah.

LIESMAN: —it’s best to use your ammunition early.

KASHKARI: I agree.

LIESMAN: But you think we’ve sort of done that already in terms of getting where you need to go with rates.

KASHKARI: I mean, this is art now. If you’re talking about what’s the difference between a 150-basis-point cut and 225-basis-point cuts, I think the 150 has a little bit more of a shock, psychological value to it, but I don’t think we’re that far off having done now 225-basis-point cuts.

LIESMAN: Except in this context there’s a potential political element to it, which is this notion of cutting rates ahead of time could be seen by some as enabling the trade war. Is that something that’s held you back?

KASHKARI: I don’t think so. I think all of us, starting with our chairman, have done a great job just saying focus on data and analysis and do what we think is the right thing to do for the economy.

You know, if we—if we did something because politicians were asking us to and it wasn’t supported by the data, we wouldn’t be doing our jobs. If we did the opposite of what they asked, just to demonstrate our independence, but it wasn’t the right thing, we also wouldn’t be doing our jobs. So the only way through this noise is to focus on data and analysis and do the right thing based on our judgments for the economy.

LIESMAN: I get that. But I also get that the seventeen members of the FOMC are humans.

KASHKARI: Sure.

LIESMAN: As far as I know. (Laughter.) And I think it was twenty-two days out of thirty days in August the president—when you guys were meeting up in Jackson Hole, the president tweeted about the Federal Reserve. He called the Fed chairman an enemy. You could just go down the list of things the Fed—the president has called the Fed. I think he used the word “pathetic” at some point in time. It’s got to have an effect, Neel.

KASHKARI: You know, you’d be amazed that the one thing that’s woven—I’ve been now at the Fed for almost four years—the one thing that’s woven into the DNA of everybody that works there, from the rank-and-file employee to the most senior person, is a commitment to public service. And everybody has been taught themselves you leave your politics at the door when you come to work in the morning. And that’s really in the DNA of the institution, which is what you’d want. And that’s absolutely carried by all the FOMC participants and especially by Chairman Powell.

So the louder the noise gets, the hotter the rhetoric, the more all of us hug data and we hug analysis and it’s our true North. And so, honestly, you know, you could never say it has zero effect on anybody, but I don’t see it.

LIESMAN: Does it make—in the—in the following context, the president has made the Federal Reserve highly political and puts you on the hook for potential blame should the economy turn down. Does it make each decision fare more existential for the Federal Reserve than it otherwise would be? In other words, do you think about the idea that if we get this wrong now, this is very bad for the institution, as opposed to if it weren’t political, it would be less so?

KASHKARI: Well, I think—look, we all do value the institution, we all want to protect the institution. But just think, if we get policy wrong in any context, it’s really painful for the American people. That’s it. I mean, if we end up having a recession, millions of people will probably lose their jobs, right? That’s devastating for those families.

So, yes, there is heightened awareness of the institutional—you know, preserving the Fed and protecting the Fed, but the stakes are always high. And that’s why I think everybody takes their jobs very seriously, regardless of the political environment.

LIESMAN: Everybody should know there’s a book that’s been written, The Myth of Fed Independence, which argues that Congress created the Fed specifically so it could blame it—(laughter)—for economic outcomes.

Let me get through a couple of quick, quick things that are out there. First, oil prices up sharply today because of a tanker incident. How do you think about higher and lower oil prices in the U.S. economy today now that we have—I mean, essentially, Saudi Arabia is inside America now, right? Twelve million barrels a day, right? So how do you think about higher—are higher prices good for the economy now? Are lower prices bad?

KASHKARI: I think it’s probably closer to neutral.

LIESMAN: And you have a lot in your district, right?

KASHKARI: We have a lot in—we have North Dakota in my district.

LIESMAN: North Dakota.

KASHKARI: I think the most remarkable thing that’s happened in the economy in the last decade or so is fracking. And I’m not getting into a climate debate. I believe in the science of climate, but fracking has effectively capped the price of energy—that’s extraordinary—because it’s not hard for them to go online with new wells and new production. So when something happens around the world, you see drillers in Texas and Oklahoma and North Carolina get to work.

And so, I mean, it’s not a hard cap, but that’s extraordinary to think that we’re more or less capping the price of energy. That’s a huge economic boost to the global economy not having that huge risk that was out there ten or twenty years ago.

LIESMAN: So translate that into today’s news. When you see a surge in the price of oil, you don’t think it sticks around very long or has some sort of limited upside?

KASHKARI: I don’t think it sticks. I mean, look at the attack on the Saudi Arabia refineries. That was a huge attack, a huge disruption, and it didn’t move the price of oil that much and it didn’t sustain.

LIESMAN: Just so everybody knows, in about five minutes I’m going to turn to you guys for questions. And one of the great things about this are the questions you ask and the sort of high level of knowledge in the audience there.

You also in your district, in addition, though, have a lot of farmers. Tell us about what’s happening with farming and why. It’s partially trade, but it’s not all trade.

KASHKARI: Yeah. So for many years now, four or five years, the ag sector has suffered from very low prices, which in large part is because they’ve had a lot of really good production and a lot of good production means a lot of volume, means lower prices. So they’ve been suffering those low prices. And now when you add to it the disruptions of the trade war—I had a—I was in South Dakota recently visiting soybean farmers. And I asked them, I said, OK, so China’s not buying your soybeans, they’re buying from somebody else, but it’s a global market. Why do you care who buys your soybeans? Because you can sell to whoever is now selling to China, et cetera, it will all rebalance. And they said no, no, no, you don’t understand, new supply is coming online to feed China. So the total volume of supply—so South America is now growing soybeans when they weren’t previously, or these certain farmers, just to supply China. So if the global volume actually increases, that’s going to have a permanent effect on prices and a permanent effect on us.

And there’s a short-term disruption because they have the infrastructure built to move their goods to the West, to ports in the West. If they now need to go East, that’s an expensive readjustment of their transportation infrastructure. So, you know, we’re hearing a lot from farmers, especially soybean farmers, about the challenges that they’ve had.

They’ve spoken very positively that Congress has given them some support and they’re saying, hey, if this trade war is going to continue, they’re going to continue needing support from Congress to offset some of their losses.

LIESMAN: Does it offset enough? Is there—is part of the softness economically in the district a result of that?

KASHKARI: Partly it is. And you’re seeing some consolidation. I mean, the ag sector has been consolidating gradually over time anyway. Smaller farmers, it’s harder for them, they sell out to bigger farmers. We’re seeing some smaller farmers sell out now because prices have been low for so many years, they don’t have a lot of hope for the future.

The one good news in all the data is that ag land prices have held up remarkably well. You’re not seeing a repricing and land prices falling. And if they did fall, that would then have implication on banks that lend to farmers because that’s their collateral, et cetera. But the fact that land prices are holding up means there’s still a lot of optimism, at least enough optimism so that investors are continuing to come in.

LIESMAN: I mean, I still have to ask you about the banks, which is the systemic issue of farming, right? Are the banks feeling the weakness? Are they—are they being hurt by the downturn in the trade war?

KASHKARI: The community banks and the rural banks that serve farmers are feeling some of the effects of this. But so far, as we’ve examined them, we still think their balance sheets are healthy. But again, a lot of this is tied to farm land prices. If you saw a repricing of farm land down, that would then ripple through the banking sector, and then I think our assessment would be different.

LIESMAN: OK. I have one more question, which is going from rural farms in South Dakota to international interest rates. How much does what’s happening in Europe affect your view of what the Federal Reserve can and should be doing? Is there some relationship that you seek between where European rates are, for example, and how high or how low the U.S. should go with its benchmark rate?

KASHKARI: Not directly. I don’t look at, you know, Europe being negative and saying, well, we can’t be this far away from them. But I do—I do take some information if—it seems like the global economy is slowing, Europe is slowing, Germany has slowed, China is slowing. I do take some information if the rest of the world is easing because they’re worried about slow global economic growth. You know, why—are we really so removed? And what would—let’s justify why we would be in a very different policy stance if the rest of the world is doing something. That doesn’t mean we couldn’t be. It may be appropriate for us to be in a very different policy stance. But let’s at least look at what are they seeing that’s causing them to draw one conclusion and do we want to—do we necessarily want to draw a different conclusion? So it’s not a direct linkage, but I think it’s worth paying attention to.

LIESMAN: And what about negative interest rates for the United States?

KASHKARI: You know, you never want to say never. I hope not. I hope we don’t get back to zero. But that’s the big challenge for advanced economy central banks is they’ve been dragged down to zero and in some cases dragged negative, and this, again, speaks to where is the neutral rate? If the neutral rate really is very, very low, then interest rates are likely to be low for the foreseeable future.

I think if there were a downturn, we would first cut the federal funds rate, then we would turn to things like quantitative easing before we would turn to negative rates. So I don’t think it’s a likelihood, but I also don’t want to say it’s impossible.

LIESMAN: Kim, you haven’t raised your hand, but I’m asking you—giving you the first question.

Wait for the microphone, tell us who you are.

Q: Thank you very much. Paul Sheard, Harvard Kennedy School. Thank you very much for the presentation, a model of clarity if I do say so.

KASHKARI: Thank you.

Q: Two quick questions. One is, you mentioned that you thought the yield curve control was an interesting idea. Is that something that the Fed is looking at in the context of its review of the tools, strategy, communication, et cetera? And if not, is that likely to happen over the next few months?

Second question on sort of U-star, the other equilibrium rate, the unemployment rate. I think the latest summary of economic projections, if I recall correctly, the median forecast of FOMC participants is about 4.2 percent. The unemployment rate is down at 3.5 (percent), U6 is just a tick above its all-time historic low. And you have made the case, I think, pretty cogently that there seems to be still slack in the labor market at 3.5 percent. So my question is, how does the FOMC and your colleagues think about the natural rate of unemployment? And why do you think it is at higher, much higher than it is at the moment? It seems to me that you could make a compelling case, just from what you’ve said this morning, that U-star is much lower, maybe it’s 3 percent. And, of course, that would turn the whole stance of monetary policy on its head as well. So what’s the thinking behind the idea that over the longer term the natural rate of unemployment is going to creep up again back toward 4 percent?

KASHKARI: Tell me your—tell me your first question again, remind me your first question.

Q: Yield curve control.

KASHKARI: Yeah.

Q: Are you looking at that in terms of your review?

KASHKARI: Yeah. I think it’s something that other members of the committee have talked about. And I don’t want to foreshadow kind of the details of which strategies will formally be analyzed or not. So far, most of the examination—for example, we had a big conference in Chicago on this—most of the discussion was on things like price level targeting, average inflation targeting to formally make up. If we undershoot inflation for a number of years, have a formal strategy to make up for that in the future. So when I think about that, that’s about how we use our tools rather than what tools we use.

The idea of yield curve control is a new tool that arguably we could use. And I’m, again, I’m open-minded to analyzing it, but I think so far most of the discussion is, how do we use our tools rather than which tools do we use?

And then the second piece about this U-star, you know, it’s a big question. And the unemployment rate is—labor force participation is another key variable in all of this and what happens to labor force participation over time. We expect that it—we know it’s trending down because society is aging. So then we look at prime-age workers; even that has been trending down where there’s no good reason that prime-age worker labor force participation should be trending down.

I think, generally speaking, most of us would think, in the long run, we’re just used to an unemployment rate in the 4s, being in the middle or being the minimum. So I think people are probably somewhat reluctant to say no, it really is 3 (percent), it really is 3.5 (percent).

I’ve basically said—my last SEP submission, I had 3.6 (percent). I basically don’t know where U-star is. And if U keeps falling, I’m going to keep lowering my U-star with you until we see wage growth. So, you know, if it stays at 3.5 (percent), I’m going to lower mine to 3.5 (percent) until we see wage growth. And so there’s just a lot of uncertainty here. You know—sorry, long answer.

When the great recession happened, the economics profession said all these people have been pushed out of the labor force, they’re gone, they’re gone for good, they will never return, structural level of unemployment is now higher than it was before. That was the conventional wisdom and it was totally wrong. And so we’ve learned that now in the last ten years that it was totally wrong. It’s going to take us time to figure out where is the new equilibrium in the labor market.

So I’m sympathetic with my colleagues because we all have a lot of uncertainty about this.

LIESMAN: I want to just follow up on that. Do you favor this idea of a kind of make-up period for inflation? If I run at 1 ½ (percent), my target is 2 (percent), should I run at 2 ½ (percent) for a while?

KASHKARI: You know, it’s—to me, when I look at the symmetric inflation target that we have now, it actually allows, in my mind, it allows us some flexibility to do some of that. The question that some people have proposed is a more formal rule that would try to make up for these prior misses. I think when you examine how these more-formal rules actually work when you put them into practice, they’re pretty complicated and they can lead to some curious, you know, outcomes.

I’m probably in the camp of let’s just live the full flexibility that our symmetry provides us. I don’t think we’ve been living that to date. I would like to see us live that going forward, but I don’t want to prejudge all of the analysis and the deliberations of the committee.

LIESMAN: So just to follow up on that again, as a policymaker in the existing structure we have, if you bumped up to 2.3 (percent), 2.4 (percent) for a while, that would not be a rationale to be increasing interest rates.

KASHKARI: Not in my mind. I mean, again, when we’ve been at 1.6 (percent) for ten years and we say we have a symmetric inflation target, misses below and above should be treated equally. If we were at 2.3 (percent) for a couple of years, we should shrug our shoulders at that. But that’s my view. Is that the committee’s view? I don’t know.

LIESMAN: Right back here.

Q: Henry McVey from KKR. Thanks for your comments, appreciate it.

KASHKARI: Nice to see you.

Q: Good to see you.

I guess just on the inflation rate, I worry that we have an artificial 2 percent inflation rate. I mean, when you look around the world right now, China is dumping excess capacity out there, your comments on demographics, and then most importantly—I think some of your colleagues have written about this—when you look at the impact of technology, it’s creating a downward pressure on prices, probably maybe forty to fifty basis points per year. So when I look at ten years we’re missing, maybe we’re not missing. Maybe, you know, you have to make adjustments, maybe 2 percent is not the right rate. How do you think about that?

KASHKARI: Well, it comes back to me for the, what’s the—what does it say about the stance of monetary policy? So let’s say technology, it’s all technology driven, it’s great innovation. So why do we need to raise rates? If there’s this great innovation that’s lowering prices and making everybody more productive, what’s the signs that the U.S. economy is overheating? So that’s ultimately the inflation is meant to be a proxy for are things getting hot and we need to cool things off.

If all—if China is dumping all this excess capacity on, OK, so why do we need to raise rates? That probably means the neutral rate is even lower if there’s all this extra capacity coming online.

So, I mean, I’m sympathetic with those as possible explanations for why the neutral rate is lower, but that doesn’t change my calculus on what the implication is for monetary policy. Nothing that you said, in my humble opinion, would call for a high policy in response to that.

LIESMAN: There was a question over here, that gentleman by the post there.

Q: Niso Abuaf, Pace University.

In your analysis of inflation, you focused on wage growth and productivity. What about the supply and demand for money? Would you care to comment on that?

KASHKARI: Yeah. I mean, there are many different definitions of money. And you go back and you read transcripts through generations past, FOMCs, there was a lot of discussion of the money supply. We predominantly focus on interest rates and inflation as the proxy for is there excess money supply or not. And so most of my attention is focused on inflation, wages, these other variables rather than a literal look at the money supply because it’s, you know, it’s changing with technology and different types of accounts and whatnot. What is money and what counts, it changes over time.

LIESMAN: Let’s jump over to the other side of the room here. The gentleman there.

Q: Arthur Rubin, SMBC Nikko.

I also didn’t pay attention enough in economics class, but I do vaguely remember that there was supposed to be a tradeoff between inflation and unemployment. And so maybe harkening back to the discussion—

LIESMAN: That’s so ’80s, that’s so ’80s. (Laughter.)

Q: Yeah. So the question is, is Mr. Phillips dead or is he just on an extended vacation in the decade since the great crisis?

KASHKARI: I’m not—even though I’ve been probably the most dovish or one of the most dovish persons on the committee and I’ve been the most outspoken about slack in the labor market, I’m not ready to abandon the Phillips curve. I look at two bridges. One bridge is between the labor market, unemployment, and wages. And there’s another bridge then between wages and inflation.

So you have two steps you’ve got to make and we’re not even making the first step. So we don’t even have wage growth implying that we’re at maximum employment, let alone the second step. So before I say let’s abandon the Phillips curve, let’s get to maximum employment and then let’s see what happens. I don’t think we’ve gotten there yet.

LIESMAN: The guy from Minneapolis-Saint Paul thinking about bridges. Wonder where that comes from?

There was a woman over here.

Q: Hi. Nili Gilbert, cofounder of Matarin Capital. Thanks for being here.

One of the things that I think is the most interesting about your career as an economist is the experience, the deep experience that you’ve had, both in the executive branch at treasury as well as in monetary policy at the Fed at a time when some economists are calling for greater coordination between fiscal policy and monetary policy. While arguably today, with everything going on in the trade war, Federal Reserve governors are having to think about using monetary policy as a tool to counter some of the economic effects that are coming out of Washington.

Obviously, you were active in the treasury at a time of the deepest economic crisis of our lifetimes. And that was a time of the greatest coordination among leaders.

I just am curious from a personal perspective, as a leader, how do you think about how your prior experiences in your career affect your stance as an economist today? Some would argue that you are the most if not one of the most dovish governors at the Fed. Is that because of some of the prior experiences that you’ve had?

KASHKARI: Yeah, I think it is. I mean, I think—so the financial crisis is burned into me, for better or worse, and, you know, in the worst moments of the financial crisis we didn’t know if we’d get through it. We didn’t know if the entire financial system would collapse and we would literally be in the Great Depression. So to be sitting here today where we’re debating 1.6 (percent) versus 2 percent inflation, are we really at maximum employment, and why aren’t we just growing a little bit faster, this is a miraculous outcome relative to where we thought we might have ended up.

So I think the big takeaway for me is public policy really matters. It really—you know, I always say to people, if you want to help a thousand people, donate to a charity; if you want to help a million people, you’ve got to improve public policy. It’s the only thing that works at that scale.

So I think the—and I saw through the crisis the devastation that so many families experienced losing their homes. Or even if you were responsible, you bought a home you could afford, but you lost your job, then you lost your home, right? It was devastating. It’s taken ten years to get the labor market back to roughly where it was. So I think that has—I carry that with me.

And so I look at, OK, I take our 2 percent seriously, I take maximum employment seriously, I look at the data, I say we’re not there. What are we doing? I wish I could give you a better answer than that.

LIESMAN: Tell people what you did during the financial crisis. It was where we met. You made some pretty big deals, right?

KASHKARI: Yeah. So, I mean, I was part of the core team at treasury and we partnered very closely with the Fed, as you said, dealing with the financial crisis and I ran the TARP program, the Troubled Asset Relief Program.

You know, my most—there are many memories. One memory is, you know, people, economists coming to my office at 10:00 at night crying, literally crying, saying that the financial system is collapsing, what are we going to do by tomorrow morning? I said all we can do, which is focus on what we can control, try to get our programs up and running, and if the financial system collapses, we’ll have to try to figure out how to put it back together.

And at the same time going up to Capitol Hill. I had many hearings. My longest hearing was six hours, forty angry members of Congress—bipartisan—basically screaming at me for six hours they were so angry about the crisis and angry about our response. You know, I never want to have to do that again; I don’t want anybody to have to do that again.

LIESMAN: Let’s go to this side of the room. The gentleman right there.

Q: Hi. Imran Chowdhury, Wheaton College.

Just a question on wage growth. What role do you think health care costs are playing in that, especially on the employer side, but also on the employee side?

KASHKARI: Well, that’s a factor in there. So when we look at wages, we have very, very different measures, various different measures of wages and compensation and hours. It’s embedded in there. So while health care costs have gone up a lot and, you know, people say, well, my food, my education costs have gone up a lot and health care costs have gone up a lot, how can you say inflation is less than 2 percent? The economists that do the aggregating of all the data and then create the baskets, it works out to what is a typical family experience, that’s where we come up with our inflation number, so it does include health care.

LIESMAN: This gentleman right here.

Q: Ed Cox working with the RNC and the Trump campaign.

The traditional unemployment rate has been seen as a lagging indicator. Given the way you—it’s now much more variable, your analysis of it is different. Is it still a lagging indicator?

KASHKARI: I think it is. I think the more-forward indicators are things like business investment. It’s about confidence in the future, they’re going to invest in the future. We are seeing business investment slowing.

The good news right now in the U.S. economy, the best news is that the vast majority of people who wants jobs have jobs and wages have been picking up. So families have more money, they’re spending that money to meet their needs. And consumption is 70 percent of the U.S. economy, so that’s good. But as you said, that’s kind of a backward-looking indicator.

The forward-looking indicators are these things like business investment, which are also showing some signs of softening.

LIESMAN: You know, I didn’t get to ask you what your actual GDP outlook is for the U.S. economy this year and next.

KASHKARI: You know, it’s low, mid 2s (percent) kind of—kind of frame.

LIESMAN: Mid 2s (percent), mid 2 (percent) is a good number.

KASHKARI: We’ll see. I mean, there’s a lot of variability.

LIESMAN: Can you commit 2 ½ (percent) this year?

KASHKARI: Honestly, whether it’s low 2s (percent) or mid 2s (percent) matters less to me, because as a monetary policymaker I’m much more focused on what’s happening the labor market, what’s happening in inflation. And that’s where I have—I’m more concerned that we’re not going to achieve our goals.

LIESMAN: Do you see us slowing next year relative to this year?

KASHKARI: I think that there was a big boost in GDP. There was a boost of optimism, both from the election and from the tax cut. And I think you’re seeing some signs of that now waning and we’re trending back down to a lower level. I would say over the long term, we still have evidence that the growth rate of the economy is going to be around 2 percent. So I think we’re slowly drifting back down to that level.

Now, is it going to be 2 ½ (percent) this year or lower this year or is it going to slow more next year? I don’t know.

LIESMAN: How about this gentleman right here.

Q: Barry Zubrow. Hi, Neel.

KASHKARI: Hi, Barry.

Q: Thank you for being here.

KASHKARI: Thank you.

Q: At the risk of taking you back to the pain of the financial crisis—and thank you for all the service you and Hank and everyone did during that period—certainly one of the predicates to the financial crisis was concern about banks being too big to fail. Tried to be addressed through legislative and regulatory actions. Yesterday, the Fed reversed some of those prophylactics over the objections of some of the governors. Do you think that we’ve solved the problem of too big to fail?

KASHKARI: Thanks for the question. Absolutely not, we have definitely not solved too big to fail. The biggest banks are bigger than they were before, they’re still too big to fail, and I think we’re moving in the wrong direction.

The best—we did a lot of analysis in Minneapolis, put out our own plan. The best thing we could do as a country is to make sure banks have enough capital to withstand their own losses.

You know, small banks in America today have much higher capital levels than the big banks. It’s the exact opposite of what you would think it should be because small banks are not going to bring down the economy. So, no, I think we need to substantially increase capital requirements on the biggest banks. I think it would be—the economy would be just fine. I think their share prices would suffer and that’s why we’re not doing it.

LIESMAN: Right here.

Q: Good morning. Doug Peterson from S&P Global.

What are the causes of and the implications of the dislocation in the repo markets the last few weeks?

KASHKARI: I think it’s—you know, we’ve been gradually reducing our balance sheet past the QE period and we’ve been draining reserves from the system. We’ve said we want to be in an ample reserve regime and we don’t exactly know what the demand for reserves is going to be.

And we know banks are demanding a lot more reserves, in part because of new regulatory requirements, tighter liquidity requirements. But some banks have huge levels of reserves, far beyond what even their minimum liquidity requirements. And so we don’t exactly know what the demand is going to be for reserves. We do a lot of surveys of banks, asking them how many reserves do you really feel like you need.

So we knew we would, as we shrunk the balance sheet, we’d get to a place where reserves were not quite scarce, but kind of approaching no longer being ample. And I think that’s what we saw. And so, you know, we’ve been doing our best to try to forecast when this would be. Banks have been doing their best to try to forecast when this would be.

Then you had some shocks of payments to the treasury that drained liquidity, which were known, but those all happened at the same time. And then you saw a spike in the repo rates. And I think the New York Fed did the appropriate things and the Federal Reserve will do what’s necessary.

This is nothing to do with the stance of monetary policy. This is about the transmission of monetary policy through the financial markets. And I think the Fed will do what’s appropriate to make sure that monetary policy is transmitted appropriately.

LIESMAN: So let’s talk about what is appropriate in this regard. The chairman yesterday said bringing reserve balances back up to early September levels. So replacing the temporary operations that have taken place so far with permanent operations would mean about a $200 billion operation. Is that the math as you get it, that the Fed has to take all the stuff it’s put out temporary overnight and now make it permanent?

KASHKARI: I think that’s an appropriate first step. I think we need to think about over the long term, you know, how do we—we know, to give you an example, as demand for U.S. dollars, physical currency, it grows at 5 or 6 percent per year just because of demand for dollars all around the world. Our balance sheet needs to grow commensurate with that just to keep liquidity in the system. So there’s—we have to figure out what is the right growth rate of our balance sheet that’s not about stimulating the economy, just about making sure there’s enough liquidity in the system.

LIESMAN: So that’s my next question, right, which is, you’re going to have to replace temporary operations with permanent operations. That’s 200 billion (dollars) over some unspecified period of time. You’re going to grow the balance sheet by 4 or 5 percent, which would be commensurate either with currency growth or nominal GDP growth. That’s 15 billion (dollars) a month. And you want me to believe this is not quantitative easing? (Laughter.)

KASHKARI: You know, if we’re buying—the whole point of quantitative easing was to try to drive down the long end of the yield curve. So why did we move—nobody cares what the short rate is. If you’re a business building a factory or a family buying a house, you care about long-term rates, your ten-year mortgage, your ten-year Treasury. So we move the short rate up and down because it has some effect on the long rate.

QE was designed to also move the long rate by us buying long-term assets, long-term bonds to drive down long rates. If the Fed is buying short-term bills just to provide liquidity to the system, there is nothing QE about that. That’s just—that’s LQ liquidity, LQDT. I mean, it’s not—

LIESMAN: That’s a lousy abbreviation. Nobody is going to pick up on that. (Laughter.)

KASHKARI: You come up with something better.

LIESMAN: But what it does do, Neel, is it does—it does potentially steepen the yield curve, right? You buy bills and you’re going to be turning long term—

KASHKARI: But no, but we’re putting—we’re buying bills, short-term money like securities, and we’re exchanging them with reserves, short-term money like securities.

LIESMAN: So the net effect on the short end of available paper is—

KASHKARI: This is the thing.

LIESMAN: Interesting.

KASHKARI: But what’s driving this? Banks today have a slight preference for reserves, which are money-like, fungible instruments, over short-term T-bills, which, by the way, are money-like, risk-free instruments. It’s a very subtle distinction between the two of those. We’re just going to be replacing one for the other. There’s nothing easing about that.

LIESMAN: Warren Mosler has a great comment. It’s the financial system is way more complicated than it’s worth. (Laughter.) I like that idea.

Let’s get to a question, all the way in the back.

Q: Andrew Klaber from Paulson & Co.

Neel, a question about improving public policy and wage growth. Over the last ten years, the stock market is up about 4x and we’ve seen a growth in inequality. At the same time, over the last couple of decades, we’ve seen a hollowing out of sources of traditional labor power, like unions. For all these factors and more, to what extent do you think there’s been a fundamental rebalancing between capital and labor in favor of capital to the detriment of labor?

And from a public policy perspective, what policies, if any, should we be thinking about when we’re thinking about wage growth in the future?

KASHKARI: Thanks for your question. So that’s absolutely been happening over the last twenty or thirty years. The U.S. economy produces so much income, the share that’s been going to labor has been gradually declining relative to capital. You’re exactly right.

I’ll say a few things. Traditionally, we’ve said this was all the domain of fiscal policy, monetary policy doesn’t have a role. I think that’s wrong. I think what we’re learning now as the labor market has gotten tighter, you are finally seeing—like, you’re seeing businesses give ex-cons a chance. You’re seeing businesses say you know what, we don’t need to do the background check for this job or we don’t need to do a drug test for this job or, you know, black-white unemployment is almost always 2x in America—good time or bad, it’s always 2x—it’s actually showing some signs of decreasing now as the labor market is getting tight.

My conclusion is monetary policy, by supporting a tightening labor market, is actually helping to shift the balance back into workers’ favor. So I think that’s really a good thing and I hope that that continues.

And then I do think fiscal policy has a role to play. And this is going to be the domain of the political system. You know, is there going to be stuff to give labor more power, et cetera? Presidential candidates can figure that out and the voters can figure that out.

But the part that I’m focused on is the part that we can influence: Let’s keep tightening the labor market. That’s shifting the balance back in favor of workers, that can help address this.

The last thing I’m going to say. People have said, oh, your low interest rates are boosting the stock market, you’re making wealth inequality worse. I see it differently. The most valuable asset for the vast majority of Americans is not their house, if they have one, it is their job. And by boosting wages, we are boosting the asset that most Americans have and we can boost the value of that and that’s doing a real favor, I think doing good.

LIESMAN: So, Neel, put your money where your mouth is on that. How far would you let unemployment go? Would it have a two handle?

KASHKARI: Until I see wage growth pick up, I don’t care what the unemployment rate is. Let it go to 2 (percent).

LIESMAN: And then wage growth above sort of that 4 percent range or 3 to 4 percent range?

KASHKARI: Three-and-a-half (percent). When I see wages at—wage growth pick up to around 3 ½ percent, factoring in productivity, et cetera, then I’ll be ready to say, hey, OK, maybe we’re there.

LIESMAN: So you’re at 1 ½ percent unemployment and you’ve got 3 percent wage growth, you’re, like, let it go?

KASHKARI: It there’s no sign at that point that the U.S. economy is overheating.

LIESMAN: OK. This gentleman right here.

Q: Good morning. Bill Perlstein from BNY Mellon.

I’d like to ask you about Libra. The initial announcement was greeted by central bankers with an awful lot of skepticism. How should we think about it? What are the major issues, from your viewpoint, on that sort of proposal?

KASHKARI: You know, I’ve read the white paper. From what I can tell, it’s just a marketing exercise. Like, what’s the difference between Libra, which is notionally going to be backed by a bunch of different—so you buy a Libra dollar, you put a dollar in, you get a Libra, then they go and they buy a basket of securities—let’s say U.S. Treasurys, Eurobonds, et cetera—how is that different from you putting a dollar in your PayPal account? So you put a dollar in your PayPal account. I don’t know what PayPal does with that dollar. Presumably they buy U.S. dollar assets and then you and I can transact.

So what’s crypto about this? I mean, my guess is Facebook wants to monetize their billions of users in financial services and they want to create some marketing excitement. I just can’t—I can’t figure out what the advantage is about buying this basket of goods versus just buying dollars and why you need a distributed ledger to do this. So it strikes me as mostly hype and, you know, we’ll see. I don’t know.

I mean, I know other people have come out and said we’ve got concerns about money-laundering. Those are all concerns that are fair and legitimate. But even the most fundamentals of if you didn’t have the central banker concern, I just can’t figure out what is actually new about this other than it’s Facebook doing it.

LIESMAN: Time for one more question—right here.

Q: A quick question. What do you think the replacement for LIBOR should be? And should it be anchored mainly as a benchmark, short-term interest rate or should it have a credit risk component as LIBOR did being interbank lending rate?

KASHKARI: Well, there are much better experts than me. I know SOFR is something that we’re all very focused on trying to migrate toward. So I’m not going to call—you know, I’m going to defer to my colleagues who are in the middle of this that, you know, SOFR is the right next step.

Obviously, SOFR rates spiked as we saw several weeks ago. And, you know, this is something that we’re going to have to keep learning about, the banks are going to have to keep learning about. I know my colleague John Williams at the New York Fed has been out front pushing everybody to say, hey, get onboard, let’s make this happen. So I’m not going to go beyond what he’s said.

LIESMAN: You know, I just want to close with a question that came up yesterday on set. And when the chairman said that we’re now going to be growing the balance sheet permanently and raising it from where we were, I was reminded of the Tom Hanks line in Apollo 13 where they relay him some instructions and he said we just lost the moon. And it strikes me that—and you’ve got to wonder where I’m going with this, right? (Laughter.)

KASHKARI: I don’t wonder.

LIESMAN: And I get that. I get that.

KASHKARI: I remember the movie, so—

LIESMAN: Yeah. We just—that’s sort of a great moment in moviedom. But I feel like we’ve just lost the attempt to return to the way it was. So talk to me about what the new normal looks like. Is it low interest rates, lower than they ever were, large amounts of reserves in the system, and going back to a smaller balance sheet and rates that kind of equal nominal growth? We’re never going back there?

KASHKARI: Well, first of all, I don’t know if those two things are related. I don’t think the fact that we’re in a low neutral rate environment is why there is this large demand for reserves. I actually view those as somewhat separate.

LIESMAN: A flaw in the question perhaps.

KASHKARI: I think that large demand for reserves is more driven by the regulatory environment that we’re in, liquidity requirements that we have for banks, and their preferences, as I talked about, for reserves over Treasurys.

The low neutral rate environment is about demographics and technology development and innovation and demands for investment capital. You know, what could change the neutral rate environment? If somebody in this room or somebody in the country, if Elon Musk goes and invents some, you know, nanotubes to Mars and it costs 4 trillion (dollars) of investment, but it’s got this great positive ROI, you’d see the neutral rate go up. If there’s some huge new thing—

LIESMAN: Because the demand for money would rise because the demand for investment is higher.

KASHKARI: Correct, because there’s some new place to invest where you can get a good positive return and a lot of capital would flow in there. That would drive the neutral rate up. That, to me, feels separate from how the Federal Reserve pushes monetary policy out into the economy.

LIESMAN: And the idea of the large balance sheet, that’s around forever from now on.

KASHKARI: For the foreseeable future.

LIESMAN: We’re never going back to a little tweak in the system to hit our target rate?

KASHKARI: No. I think we’re going to be tweaking the system from just a somewhat larger balance sheet perspective.

LIESMAN: Please join me in thanking Neel Kashkari. (Applause.)

KASHKARI: Thank you very much.

(END)