Federal Reserve officials are trying to figure out whether they will need to raise interest rates high enough to slow U.S. economic growth in the coming years, or if they can stop before the higher borrowing costs start to bite, Minneapolis Fed President Neel Kashkari said.

The debate about whether the current level of U.S. unemployment might be too low to keep inflation stable and therefore necessitates tight monetary policy is "a very honest assessment of the confusion" among central bankers at the moment, Kashkari said in an interview airing Thursday on Bloomberg Television.

"I would be comfortable with us moving to a neutral rate -- not stimulating the economy, but not also constraining the economy -- and once we get to neutral, let’s just wait and see how inflation evolves," Kashkari said.

The confusion reflects uncertainty over a relationship between unemployment and inflation that was posited by Milton Friedman in the 1960s and has guided central bankers ever since. The idea is that when the unemployment rate falls below its so-called natural rate, which can’t be observed directly and therefore must be estimated, inflation will accelerate until the unemployment rate goes back up to the natural rate.


It’s the central bank’s job to make the unemployment rate go back up to stabilize inflation if necessary, by raising interest rates above the so-called neutral interest rate, which also must be estimated. The uncertainty -- which has arisen because unemployment has continued to fall without putting much upward pressure on inflation -- is casting doubt on whether that will be necessary.

"Once we get to neutral, are we going to go beyond neutral, and does the data -- does the wage growth, does the inflation data -- actually support...

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