Kashkari Vs. Goolsbee, Hawk Vs. Dove: What's Next For The Fed?

Two Federal Reserve presidents, traditionally opposed in their respective stances, seem to agree on at least one matter concerning the future direction of monetary policy.

Austan Goolsbee, President of the Chicago Federal Reserve, leans toward the so-called “doves.” Neel Kashkari, President of the Minneapolis Federal Reserve, is often recognized as a “hawk.”

Both economists want more data to determine the Fed’s next steps.

Kashkari Believes Policy Is Not Restrictive Enough

Kashkari, in an appearance on CNBC, pointed out that the Fed has increased 10-year real interest rates by approximately 200 basis points since the period before the pandemic.

“This is about equivalent to as much tightening as we did in the 1994 timing cycle,” he said. Despite this substantial tightening, “we’re not having as much downward pressure as 200 basis points of tightening would have implied,” Kashkari added.

Further, he expressed concerns about the current perception of financial conditions.

“The business community does not feel like financial conditions are tight, that makes me question, maybe we’re not as restrictive as we would have guessed,” he added.

Overall, Kashkari states that he feels comfortable in maintaining a wait-and-see mode dependent on upcoming data.

Discussing whether recent inflation surprises could be part of a more structural issue, Kashkari stressed the housing market dynamics.

Ongoing disruptions in the housing market, especially due to the undersupply of new homes, could lead to higher neutral interest rates.

Goolsbee Sticks To The Dual Mandate

Softening the tone, Goolsbee emphasized the heightened policy restrictiveness, “the level of that is as high as it’s been in some time. I feel like we’re in a restriction.”

The Chicago Fed President stressed the importance of sticking to the dual mandate, which not only looks at inflation but also at the jobs market.

When asked about the potential for higher rates in the future, Goolsbee remains cautious.

“Nothing is never not on the table,” he said. “The job of central bankers is to be paranoid about everything.”

Goolsbee distanced himself from speculative discussions on the neutral interest rate, echoing the teachings of his mentor, Paul Volcker: “I’m more old school. Paul Volcker was my mentor. Our job is to act. The market’s job is to react, and let’s not get it mixed up.”

Market Reactions

Treasury yields remained relatively stable following the comments from the two Fed officials. The 10-year yield stayed at 4.5%, marking an increase of 5 basis points for the day.

The stock market also showed little change.

• The S&P 500, as reflected by the S&P 500 ETF Trust SPY, is marginally up by 0.1%.
• The Dow Jones Industrial Average notably rose by 0.3%, aiming for its eighth consecutive session of gains.
• Tech stocks saw a slight uptick after starting the day on a flat note.
• Consumer staples, as tracked by the Consumer Staples Select Sector SPDR Fund XLP, emerged as the top performer for the day, up 0.5%.
• Consumer discretionary lagged, with the Consumer Discretionary Select Sector SPDR Fund XLY down 0.6%.

Now Read: Consumer Sentiment Falls In May, Inflation Expectations Strongly Exceed Fed’s 2% Goal: ‘They Now Perceive Negative Developments’

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