Neel Kashkari is the President of the Minneapolis Fed and an extremely smart guy. He has Indian heritage and was born to Kashmiri Pandits who migrated to the United States. He formerly worked at Goldman Sachs and was Assistant Secretary of the Treasury for financial stability from October 2008 to May 2009. He also worked at Pimco in a senior role. He is a strong Republican and failed to become the governor of California in the 2014 election.
But what is very important is that he was the most dovish among the president and governors that make up the FOMC. I remember in 2017, I held a sizable short position in dollars against most of the leading currencies just ahead of an FOMC meeting when everyone was expecting the Fed to raise rates and there will be a consensus among all members. My partner was a little jittery about my holdings as I was leveraged five times and asked me, “why are you so bearish on the dollar”. I said just watch, the Fed won’t raise rates this time and Kashkari will vote against the consensus. True to my conviction, Kashkari voted against any hike and the dollar fell sharply that day and I had a good day.
But Kashkari now has had a change of religion and has become the most hawkish guy at the Fed. It is very rare that Fed officials make ideological transformations that quickly. Take Janet Yellen for example. For all the period that she was president of the San Francisco Fed, she was the most dovish person that made up the FOMC. Later when she became Fed Vice-Chairperson and Chairwoman she started to become more neutral.
Monetary policy views are like political views. The doves want to keep borrowing costs as low as possible and the hawks want to protect the purchasing power of the currency at all costs at the expense of the small guy. It is not common for a Democrat to become a Republican and it’s equally rare for a hawk to become a dove or vice versa.
As recently as in 2021, Kashkari said that he wanted to keep the policy rate at zero until at least 2023. But just about a week back he said that the recent inflation readings were very concerning and that the Fed was still committed to its 2% inflation target. He further stated that “we are going to do everything we can to try to avoid a recession but we are committed to bring inflation down and we are going to do what we need to do.”
This probably must be one of the fastest about faces on monetary policy in the history of the Fed. What do you think must be motivating him?
There was no reputational cost of wanting zero rates when inflation was negligible. But maintaining a dovish stance in the wake of 9 % inflation is being “pig-headed”. It’s possible that Kashkari simply didn’t expect inflation to rise so much and when it did he changed his tracks. Changing your opinion with the arrival of new information is not a bad thing. That only confirms that you are intellectually flexible. For Kashkari to continue to vote against rate hikes while inflation is rampaging would have undermined both his and the Fed’s credibility. If it continued probably it would have ended his career too at the Fed.
Kashkari probably is the youngest president among all the other regional presidents and if he had someday hopes of becoming the Chairman, those hopes and ambitions would have taken a big dent if he didn’t go along with the group. In politics and most organized structures, consensus (groupthink) is valued more than being right (but alone).
The Fed lost serious credibility when inflation rose sharply and losing face is the worst thing in the world for the Fed. Now, most of the Fed Presidents and governors are aligned in their public statements and it is unlikely they will cut rates anytime soon. At the same time, I feel the Fed will continue to be more threatening than actually raising rates much. All this will increase volatility in the markets as the Fed will continue to be wrong in their policy matters as politics will play a major role in their decision making too.
The inflation data release later in the day will be very crucial for Fed policymakers and market participants. My hunch is it should come lower. Gas prices have about a 1/5th weighting in the consumer price index. Gas prices have come down by 7% since the last inflation data. That’s good news for inflation. If core CPI excluding food and energy also comes lower, it will further support the stock market. It will also improve Fed’s credibility in their communication that they have reached the neutral level for interest rates.
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Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and multi-billion dollar portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund.