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Minneapolis Fed President Neel Kashkari argued in an essay that Fed’s current monetary policy stance “may not be as tight as we would have assumed”. This would afford Fed valuable leeway to sift through incoming economic data before deciding on any reduction to the federal funds rate. More importantly, that’s “with less risk that too-tight policy is going to derail the economic recovery”.

Kashkari pointed out a dual phenomenon observed since September: Swift decline in inflation rates alongside a “remarkably resilient” economic growth, which even accelerated in the latter half of 2023. This trend challenges the conventional expectation that tight monetary policy, aimed at curbing inflation, would necessarily result in weakened economic growth and labor market conditions, including spikes in unemployment.

“But that is not what we have experienced in recent quarters,” Kashkari observed.

He suggests that the decrease in inflation may be largely attributed to improvements on the supply side, which have enhanced production capabilities and helped realign supply and demand, thus mitigating inflationary pressures.

Full essay of Fed Kashkari here.

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