Neel Kashkari says the quiet part out loud in the markets


Neel Kashkari, President of the Federal Reserve Bank of Minneapolis, has just said what markets have long suspected but what active central bankers dared not admit: Markets need to go down — indeed, that is the point of the Fed’s rate hikes and marathon -jawbone. And that was the goal of Fed Chair Jerome Powell’s annual speech in Jackson Hole, Wyoming, which sparked the worst sell-off in stock markets since June.

Here is Kashkari’s quote on Bloomberg’s Odd Lots podcast with Joe Weisenthal and Tracy Alloway:

“I was really happy to see the reception of Chairman Powell’s speech in Jackson Hole,” Kashkari said in an interview with Bloomberg’s Odd Lots podcast on Monday, reflecting on the precipitous decline following Powell’s speech. “People now understand the seriousness of our commitment to bringing inflation back to 2%.”

On the one hand, the mood is obvious. Since the beginning of the year it has been clear that buoyant markets run counter to the Fed’s declared goal of fighting inflation. The central bank has primitive tools, and one of them is to curb the demand side of the supply-demand equation by making people feel a little poorer, as I wrote in March when the Fed launched its interest-rate campaign. My Bloomberg Opinion colleague Bill Dudley, who was President of the New York Fed, shared this view in his article “If Stocks Don’t Fall, the Fed Needs to Force Them.”

Markets still haven’t quite got it, as was evident during this summer’s market rally that swept away most risky assets. The result? Powell decided to give what might be his most parsimonious and direct political speech ever, about where interest rates will go and how long they will stay there. Now we have Kashkari – who is not a voter on the Federal Open Market Committee this year – saying unequivocally that market strength in this environment is a bad thing. Here he is again in the Odd Lots interview, which will be published in full later this week:

“I certainly wasn’t thrilled to see the stock market rally after our last Federal Open Market Committee meeting,” he said. “Because I know how committed we all are to bringing inflation down. And I kind of think the markets got that wrong.”

This is clearly not your parents’ opaque Fed that had market participants read tea life. Some observers are still rethinking things and assuming the Fed is playing some sort of three-dimensional chess (it isn’t). In such cases, the central bank tells us exactly what it wants, and markets just have to listen.

More from other authors at Bloomberg Opinion:

• What the Hawks didn’t get in Jackson Hole: Daniel Moss

• Powell must walk the talk: Bill Dudley

• Jerome Powell fights inflation – and wins: Karl Smith

This column does not necessarily represent the opinion of the editors or of Bloomberg LP and its owners.

Jonathan Levin has worked as a Bloomberg journalist in Latin America and the US, covering finance, markets and M&A. Most recently, he was the company’s Miami office manager. He is a CFA charterholder.

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