The immigration surge is keeping inflation and interest rates high, Federal Reserve Governor Neel Kashkari said. interview Together Telegraph.
Minneapolis Federal Reserve Bank President Neel Kashkari said he won’t consider cutting interest rates until “inflation has had a number of months of real improvement,” and he argued that immigration is preventing that improvement.
Kashkari warned that U.S. borrowing costs are likely to remain stable “for an extended period of time.”
He is particularly frightened by the surging demand for housing that has not cooled despite rising interest rates.
Kashkari’s shocking comments on immigration are at direct conflict with arguments by the Biden administration and its allies that rapid immigration is suppressing inflation by depressing wages.
Kashkari said a “dramatic increase in immigration” is fueling demand for housing, not the same as an increase in people working from home and a long-running housing construction slump — a perfect storm that’s heating up the housing market.
“[If the] “If this dramatic increase in immigration continues, it will have a major impact on the economy,” Kashkari said. Telegraph.
“Housing is traditionally the sector of the economy that is most sensitive to interest rates, and housing has shown incredible resilience, and there are even signs that new leases are rising again,” Kashkari said. “This is particularly concerning because, if you do the math, it takes more than a year for new leases to be reflected in the actual measured inflation numbers. And if new leases are rising again, that’s especially concerning.”
Kashkari argued that the US experienced a housing shortage due to a lack of home construction in the decade following the financial crisis and the collapse of the mortgage bubble, at the same time as the demand for housing increased after the pandemic.
“Additionally, there has been a surge in immigration in recent years, and immigrants clearly need places to live. All of these factors could be driving up demand for housing,” Kashkari added.
The Fed has kept interest rates steady at 5.25% to 5.5% since July 2023. At the beginning of the year, Fed officials and financial markets expected the central bank to cut rates several times this year.
But inflation jumped to an annualized 3.4% in the first three months of this year, spooking markets and forcing Fed officials to reassess their plans. Fed Chairman Jerome Powell recently said that reaching the central bank’s 2% inflation target “will take longer than previously anticipated.”
Kashkari said a rate cut is unlikely anytime soon, and while he wouldn’t rule out the Fed raising rates next, he sees that as an unlikely outcome. In his view, the Fed is more likely to keep rates on hold for longer than many expect.
“Given the balance of risks, stock prices are likely to fall, but nothing should be ruled out at this point. A more likely scenario is that current levels will be maintained for an extended period of time,” he said.
The governor also noted that services inflation has become “much stronger” over the past few months, making it more difficult to justify a rate cut.
“We saw a very rapid deflationary development in the second half of last year that was reassuring for all of us because the economy was doing well and inflation was coming down rapidly, and I expected and hoped that would continue into the first quarter of this year,” he said. [but] “Inflation has remained roughly flat,” Kashkari said.
Kashkari, like other Fed officials, said they needed strong evidence that inflation would return to 2 percent before they would be convinced to cut rates.
“I want to see evidence that inflation is falling significantly towards our 2 percent target. I’m not saying it has to fall all the way to 2 percent before we start cutting rates, but we need to be confident that we’re heading there before we feel comfortable normalizing rates,” he said.
