By Dan Burns
Aug 5 (Reuters) - Clearly communicating what the Federal Reserve's "reaction function" will be to various scenarios is helpful for the public and markets and should be continued, Minneapolis Fed President Neel Kashkari said on Wednesday in a jab at the communications stance adopted by new U.S. central bank chief Kevin Warsh.
Kashkari, speaking in a CNBC interview in which he repeated his call for the Fed to begin a series of small interest rate hikes to contain inflation that is running
above the central bank's 2% target, said it is valuable for market participants and others to understand how the Fed might likely respond to a given set of economic developments.
"I think there is value in continuing the tradition of explaining our reaction function to the public, and letting the public figure it out from there," he said.
Kashkari and other U.S. central bank officials, such as Fed Governor Christopher Waller, contend that public depictions of the reaction function are distinct from so-called forward guidance, which Warsh actively steers away from. The former provides a helpful understanding to markets — which do much of the Fed's policy transmission to the economy — of how officials will likely interpret and respond to developments around inflation, employment and the wider economy. The latter — forward guidance — is a more specific roadmap of future policy actions, which most Fed officials now agree is a tool best limited to emergencies.
Warsh, who has personally ceased providing any form of forward guidance about coming Fed actions and has seen to its removal from its policy statements, has set up five task forces to explore ways the central bank could overhaul how it conducts policy, including one dedicated to its communications strategies.
He has asked for the task forces to deliver recommendations by the end of 2026, but has said he may begin gathering interim updates as early as this month.
FOCUSED ON GETTING INFLATION BACK TO 2% TARGET
Asked about a report that Warsh has also floated the idea of cutting back on the number of regularly scheduled Fed policy meetings each year, Kashkari said he didn't have a strong opinion. The Fed has held eight scheduled meetings a year dating back to 1981, with the head of the central bank empowered to convene ad-hoc or emergency meetings during exigent circumstances or crises, such as the COVID-19 pandemic.
"I don't think there's any magic number about eight or 10 or six," Kashkari said. "You know we always have the ability to call emergency meetings if things happen, but that's a big event, when the FOMC (Federal Open Market Committee) calls an emergency meeting. It really sends a signal that we're concerned about something. And so ... I'm open-minded."
Kashkari dissented at last week's rate-setting meeting when the Fed opted to leave its policy rate unchanged in a range of 3.50% to 3.75%, saying he would have preferred a quarter-percentage-point increase.
On Friday, he published a short essay in which he called for the Fed to begin a series of small increases to contain inflation, which he says has been driven both by a series of supply shocks — the war in Iran being the most recent — as well as excess demand in some categories associated with the artificial intelligence technology investment boom.
"My goal is not to slow the economy down," Kashkari said. "The goal is to get inflation back down to our 2% target."
"We have one tool," he said. "Now I don't think most of the inflation that we've experienced is because of economic growth and robust demand. I think most of the inflation has been because of these successive supply shocks. There is a demand element layered on top of it as well, and nonetheless, it's the Fed's job to get inflation back down to our 2% target."
(Reporting by Dan Burns; Editing by Andrew Heavens and Paul Simao)
