The US Federal Reserve must do a better job of responding to the rising tide of economic anger in America that is leading to a surge in protectionist rhetoric on the presidential campaign trail, according to the newest member of its policy committee.
In an interview with the Financial Times, Neel Kashkari, who took over as head of the Minneapolis Federal Reserve at the start of the year, warned that the Fed needed to work harder to rebuild public trust and communicate with American citizens. Economic anger, he said, was “all around the country and it is non-partisan”.
Mr Kashkari’s first public forays this week have quickly positioned him as an outspoken voice among the central bank’s policymakers.
As a senior treasury official in the administration of George W Bush and the first Obama administration, Mr Kashkari was a key architect of Wall Street’s 2008 bailout. But on Tuesday, in his first speech since joining the Minneapolis Fed, he called for regulators to consider breaking up the largest US lenders, which he said remained “too big to fail”.
In his interview with the FT he blamed the bailouts he oversaw as one of the “root causes for the loss of trust” in the US’s economic managers. Those actions had “really violated a core American belief” that risk takers had to bear the consequences of things going wrong, he said, and “it really leads to great anger if you violate the core beliefs of a society”.
The impact, he said, had been made worse by a history of opacity at the Fed and a past institutional reluctance to explain monetary policy clearly to the American public.
The Fed was now paying the price for decades of “very poor” communications during which it “adopted this Wizard of Oz routine that ‘We are so mysterious and you can’t understand what we are doing’,” he said, “and that really hurt trust between the people and the institution”.
Anger about the economy was also fuelling support for those advocating the erection of new barriers to protect US industry. “I don’t think protectionism is the right path. I think we need to promote free markets around the world. But some of the anger is understandable,” he said.
“We need to promote free markets on both sides. It can’t just be the American economy that is free and our trading partners are not free. So I understand that anger that is there. We need to push back against that [protectionist rhetoric] but also push out globally for free markets everywhere.”
His words come amid a presidential election campaign that is being dominated by frustration among voters about the sluggish growth since the 2007-09 financial crash. Some 72 per cent of the electorate feels the economy is still in recession, according to the American Values Survey released in November — even though economic analysts date the Great Recession as having ended in mid-2009.
That frustration has spilled over into antipathy towards the Fed itself, which is being expressed on both sides of the political divide. Democratic lawmakers have questioned the central bank’s decision to lift interest rates, warning it could stifle wage growth, while Republicans are calling for greater scrutiny of the Fed’s decisions amid lingering anger over the scale of its interventions during the crisis.
But above all it has helped fuel the rise of populist candidates such as Bernie Sanders, a self-described democratic socialist, and Republican frontrunner Donald Trump, both of whom have called for the US to do more to protect its own industry from cheap imports and foreign competition, and found support for those policies.
Mr Kashkari praised the work of Janet Yellen, the current Fed chair, in speaking directly and candidly in explaining the central bank’s policies, but said the central bank needed to go even further still.
Mrs Yellen was “trying to do the right thing for the country”, and if people got to know her and other people across the Fed system “they would be very proud we have this institution in our country”. However, he added, “we don’t really let them see in”.
“I think we could do a better job,” he said. “The press conferences [held quarterly by the Fed chair] are a step in the right direction and Chair Yellen is very candid in those press conferences and addresses the questions directly. That’s positive.”
But the Fed needed to “look for more opportunities like that. It has to happen on all levels.”
Monetary policy was hugely complicated, and it was not possible to explain every twist and turn of the debate to the whole population. That meant it was critical that the public trusts the central bank, he explained.
“You are not going to have the population as a whole understand all the nuances of what we are talking about here. They need to trust us. They need to know that we care. If they trust us and know that we care, they are going to give us the benefit of the doubt on some of the complexities they may not fully understand.”