Federal Reserve Bank of Minneapolis President Neel Kashkari said Thursday that “monetary policy has been too tight in this recovery,” adding that the Fed is likely farther from its dual mandates of maximum employment and stable prices than his colleagues may think.

“I don’t think our approach to monetary policy in this recovery has provided as much stimulus as the economy required,” Kashkari said in a speech in Santa Barbara, California.

Kashkari said the Fed’s decision to raise rates to the current target range of 2.25% to 2.5% contributed to a slower economic recovery and low inflation expectations, “which directly saps the Fed’s ability to respond to a future downturn.”

Since 2015, the Fed has hiked rates nine times, four of which were done in 2018 under Chairman Jerome Powell.

Kashkari, who was not a voting member of the committee during 2018, said the Fed “misread” the labor market by assuming that inflation would be triggered by the unemployment dipping below 5.1%. Some policymakers have subscribed to the idea of a “non-accelerating inflation rate of unemployment” (NAIRU), which suggests that when the labor market reaches a theoretical level of tightness, prices should increase.

The unemployment rate is now at 3.6%, a 49-year low, and the Fed acknowledges that inflation is “running below” its 2% stated target.

Kashkari said the headline unemployment number is masking modest wage growth and a steady decline in labor force participation.

“It seems clear to me that we are not yet at maximum employment,” Kashkari said.

Kashkari’s view on rates being too high comes as the Fed remains on pause on the path of rates. Powell, for his part, has not telegraphed whether the next move will be a rate hike or a rate cut. But markets are optimistic on the Fed eventually lowering rates; as of Thursday morning fed funds futures were pricing in a 73.5% chance of at least one 25 basis point rate cut by the December meeting this year.

Kashkari has been a vocal opponent of raising rates amid his colleagues’ efforts to normalize the rates environment. During his time as a voting committee member in 2017, he dissented against all three decisions that year to raise rates.

At the time, Kashkari said he would not support rate increases until he saw proof that inflation was picking up.

“These trends suggest that monetary policy is entering a delicate phase,” he wrote in a blog post after his December 2017 dissent. “We all want the economic expansion to continue.”

The Fed is currently in the process of reviewing its inflation-targeting strategy, which policymakers are calling into question as price increases float at levels below the central bank’s target.

In his remarks Thursday, Kashkari said the Fed should have communicated that its “symmetric” 2% target meant that the Fed would tolerate inflation of 2.5% for some time. With Fed strategies now under review, Kashkari said targeting price levels would be “attractive” to allow inflation to run above its target.

—

Brian Cheung is a reporter covering the banking industry and the intersection of finance and policy for Yahoo Finance. You can follow him on Twitter @bcheungz.

Alice Rivlin, trailblazer in the economics field, dies at 88

Trump to Fed: Cut rates and help us win the trade war

Inflation expectations dip as Fed grapples with stimulating prices

What a higher education tech company tells us about a tightening labor market

NY Fed: Yield curve shows 27% chance of recession in the next year

Congress may have accidentally freed nearly all banks from the Volcker Rule