(Bloomberg) — Minneapolis Federal Reserve Bank President Neel Kashkari said the central bank will likely keep interest rates the same “for an extended period of time” until officials are sure inflation is on track toward their target.
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In an article published earlier Tuesday, the head of the Federal Reserve Bank of Minneapolis said the latest inflation data raises questions about whether monetary policy is restrictive enough to fully return price growth to 2%, a rate that policymakers see as the ideal point. In a healthy economy.
“The most likely scenario is that we will be here for a long period of time,” he said Tuesday at the Milken Institute Global Conference. “If inflation starts to ease or we see some notable weakness in the labor market, that could prompt us to cut interest rates.”
“Or if we are ultimately convinced that inflation is now entrenched at 3% and that we need to go higher, we will do so if necessary,” he added.
Kashkari said this is not the most likely scenario – and the barrier to raising interest rates is very high – but he does not rule it out.
Kashkari pointed to continued housing inflation as a possible indicator that neutral interest rates, those that do not constrain or stimulate the economy, may be higher in the short term. This could mean the Fed has more work to do to calm inflation, Kashkari wrote in the article.
“My colleagues and I are of course very pleased that the labor market has proven resilient, but with inflation in the fourth quarter moving sideways, it raises questions about how restrictive the policy really is,” Kashkari wrote.
Fed officials have kept interest rates unchanged since their July meeting, and stronger-than-expected inflation data has prevented officials from cutting borrowing costs from their highest levels since 2001. Investors now expect just under two cuts this year, from Up to six discounts are expected. At the beginning of 2024.
Kashkari, who expected two rate cuts for this year when Fed officials met in March, said Tuesday he expects two to zero cuts for 2024 when officials next meet in June, based on incoming inflation data.
Inflation according to the Fed’s preferred measure rose 2.7% in March. While this is lower than the peak of 7.1% reached in 2022, it is faster than the 2.5% pace seen at the beginning of this year.
Price pressures
One of the biggest drivers of inflation right now is housing. The shortage in supply is keeping prices high even as mortgage rates remain near their highest levels in more than 20 years.
Read more: Rents are the ‘biggest stumbling block’ for the Fed in taming US inflation
“Given that housing is a key channel through which monetary policy influences the economy, its flexibility raises questions about whether policymakers and the market are misunderstanding neutrality, at least in the near term,” he said.
Kashkari said he raised his long-term neutral interest rate forecast to 2.5% from 2%. Some of his colleagues at the Federal Open Market Committee also raised those estimates, with the median forecast for the long-term federal funds rate rising to 2.6% from 2.5% in the most recent forecast published in March.
The head of the Minneapolis Fed, who will not vote on monetary policy this year, stressed that the central bank should set policy based on where the neutral short-term interest rate is.
“Today’s uncertainty about the neutral venue creates a challenge for policymakers,” he added.
Kashkari last published an article in early February, in which he said that policymakers have time to measure incoming data before cutting interest rates.
He then said that shifts in the post-pandemic economic recovery could mean neutral interest rates have risen. Kashkari has written a series of articles since 2022 as the Fed has been tightening policy in an attempt to cool inflation.
(Adds new Kashkari comments in ninth paragraph.)
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