Fed’s Kashkari, a number one dove, backs two interest-rate hikes this 12 months
Inflation has risen higher and has lasted longer than expected, Minneapolis Fed President Neel Kashkari admitted on Tuesday.
Since joining the Fed in 2016, Kashkari has become a leading advocate for the central bank to keep interest rates low to boost the job market. Last year, he downplayed the risk of higher inflation, saying the gains were “temporary”.
The Fed’s most popular inflation indicator, the Household Consumption Spending Index, rose to 5.7% a year in November. That is the fastest pace since 1982 and well above the central banks’ inflation target of 2%.
Given the new reality of persistent inflation, Kashkari said the US economy is facing two divergent paths, both of which are quite risky.
One risk is that recent high inflation may lead consumers to expect higher inflation. Economists generally believe this can set in motion a dangerous upward spiral that Kashkari said would be costly to the economy.
“None of my colleagues in the Federal Reserve will allow this to happen,” he said. In general, although he didn’t mention it, it would mean higher interest rates.
On the flip side, COVID could subside and the U.S. economy could again be trapped in an under-inflation environment, Kashkari said.
Low inflation can cause the economy to constantly flirt with the recession and limit the Fed’s ability to stimulate growth. This risk could lead the Fed to hold back aggressive rate hikes.
“It will be a tricky task to control these two possible different outcomes,” said Kashkari.
“Hopefully we can watch what happens on both the demand and supply sides over the next six months and next year to set the right course for the US economy,” he said.
In a separate essay posted on his regional bank’s website, Kashkari said he had planned two rate hikes at the FOMC meeting in December 2022. In September, Kashkari saw no need for rate hikes this year.
Two steps would allow the Fed to offset the risks, he said.
“If the FOMC overreacted to the current high inflation data without realizing that we were destined to land back in the low inflation regime, many Americans might have been unnecessarily prevented from participating in a recovery that was slower than necessary because of the Monetary policy too tight, ”he wrote in the essay.
Kashkari said the demand factors that drove inflation are likely to go away. However, companies say the supply chain problems that are causing companies to raise their prices and boost inflation trends will persist through 2023, he said.
Investors now see a more than 50% chance that the Fed will hike rates in March. That would be the first rate hike since last year 2018. There is talk of the first step by half a percentage point.
The yield on the 10-year government bond TMUBMUSD10Y, 1.654%, rose steadily in the first two trading days of the new year.