Minneapolis Fed President Neel Kashkala warned Tuesday that the Fed’s interest rate target may not be high enough to curb inflation.
kashkari argued in a published essay The Minnesota Fed’s website said the strength of the labor market and the resilience of the housing market may mean interest rates need to be higher than Fed officials think.
“Compared to the pre-pandemic period and some previous tightening cycles, the FOMC has undoubtedly implemented meaningful tightening policy. Nevertheless, this explains the robust economic activity sustained during this cycle. It is difficult for me to do so,” Kashakli wrote.
Federal Reserve Chairman Jerome Powell and other U.S. central bank officials have said they believe the current stance of monetary policy is restrictive enough, or suppressing economic activity, to reduce inflation. The Federal Reserve raised its target for the benchmark federal funds rate from a range of 0% to 0.25% to 5% to 5.25% from March 2022 to July 2023, the fastest increase in decades. It will be an interest rate hike cycle.
Kashari said the strength of certain parts of the economy, particularly housing, suggests that neutral interest rates — rates that neither suppress nor stimulate the economy — may be higher than Fed officials think. He said that As a result, current interest rates will be less above neutral and therefore less restrictive than thought.
“Given that housing is an important channel through which monetary policy affects the economy, housing resilience may be a false implication that policymakers and markets are neutral, at least in the short term. “This raises the question,” Kashkari wrote.
This could mean that interest rates may need to rise further to bring inflation down to the Fed’s 2% goal.
Kashkari said that although there was evidence of drag in some sectors of the economy from rising interest rates, overall economic activity was showing “remarkable strength”. Economic growth is strong and unemployment remains very low.
“Although the latest headline GDP appears to have weakened somewhat from the previous quarter, the slowdown was primarily driven by inventories and net exports. Underlying domestic demand remained strong,” Cascari wrote. There is.
Kashkari points out that there are some signs that fiscal conditions are tight. These include a 20-month inverted yield curve and historical comparisons. Similarly, auto loan and credit card delinquencies indicate the burden of high interest rates on American consumers.
The strength of the housing market, one of the most important channels for transmitting monetary policy to the real economy, is pointing in the other direction, Cascari writes. The housing market may be supported by a combination of a housing shortage following the housing bubble, a large influx of immigrants in need of housing, and increased demand for housing due to remote work.
Even if some of these factors turn out to be temporary, it could mean that the neutral rate could be higher, at least for now, Cascari argues.
Governor Kashkari said the central bank had raised its outlook for the long-term neutral interest rate from 2% to 2.5%. Kashkari is not a voting member of this year’s FOMC.
