Minneapolis FED President Neel Kashkari warned that the FED will need to maintain higher interest rates for a long time. This warning came in response to repeated inflation overshoots and resilient demand.
“It’s likely that we’ll want to hold rates for a while longer,” Kashkari said in an interview with the Financial Times’ Monetary Policy Radar before the publication blackout period associated with the Fed’s June 12 Federal Open Market Committee meeting.
Although he is not a voting member of the committee this year, Kashkari has been hawkish on the FOMC lately. Its impact increased after inflation surprised upwards for three consecutive months in early 2024.
Kashkari will express his views on the possible course of interest rates in the dot chart, which will be published on June 12 and reflects his hawkish stance.
He said he was watching housing and services inflation particularly closely and believed both would likely remain high in the coming months.
Regarding housing, Kashkari said, “we are not seeing demand decrease as much as expected.” New rents and rentals are rising again, meaning “housing inflation will remain high for some time.”
This contrasts with Jay Powell’s view. The current FED President has repeatedly emphasized that falling rents will be an important factor in reducing inflation in the future.
Regarding services more broadly, Kashkari disagrees with the recent narrative that labor demand in the US has noticeably softened.
He bases his view on anecdotal evidence from his district, which is home to a wide range of industries from agriculture to mining to healthcare. Many businesses report that the labor market is still tight and they are still competing to attract workers for vacant positions.
The fact that the labor market is so strong is beneficial to the FED, as it means that the FED will not have to compromise between its dual goals of 2 percent inflation and full employment.
If the Fed were still facing skyrocketing unemployment along with high inflation, it would be much worse off.
But the combination of a strong economy and continued high inflation means that “the cost to our credibility of prematurely declaring victory is so high that we should not rush to cut rates,” Kashkari notes.
He believes that his hawkish stance is shared by the US public. When asked why U.S. consumers feel so negatively about the economy, he said they “really instinctively hate inflation,” but because most U.S. mortgage holders borrow at long-term fixed rates, most people haven’t yet noticed the higher interest rates.
Speaking to the Financial Times, Kashkari stated that the FED “will never want to ignore raising the policy rate” but that keeping interest rates constant would be enough to reduce inflation.
However, Kashkari said that if a rate hike is necessary, this move would not jeopardize the FED’s credibility because the central bank has never completely closed the door to this possibility.
*This is not investment advice.