Minneapolis Fed President Neel Kashkari said this week that ultimately, the Fed could undertake a series of rate hikes if inflation pressures related to the turmoil in the Middle East persist with higher oil and gas prices, inflation expectations continuing to climb, and the stock market pushing higher.
The Fed and its new Chair, Kevin Warsh, could find themselves in an increasingly difficult position.
The challenge for policymakers is that no one knows how long the conflict in the Middle East will last.
The longer the war goes on, the harder it will become for the Fed to dismiss the inflation impact as merely “transitory.”
Kashkari said Thursday that lowering inflation remains his top priority, warning that consumer prices are still “much too high.”
Speaking to CNBC’s Kaori Enjoji at the Bank of Japan-IMES Conference, Kashkari said that the Fed would continue taking a “balanced approach” to its dual mandate of price stability and full employment, but he said that inflation has remained above the Federal Reserve’s 2% target for more than five years, while the labor market is in “decent shape” right now.
“I am focusing heavily on inflation. I’m not ignoring at all the labor market. We need to pay attention to both sides, but the labor market is in decent shape right now, while inflation is simply much too high,” he said.
Inflation Expectations
Kashkari said that the longer inflation remains elevated, the greater the risk that inflation expectations become unanchored and rise.
“If that were to happen, then we’d have to respond even more aggressively, so we’re much better off doing what we need to do to keep inflation expectations anchored.”
He said that global inflationary pressures have been fueled by the Covid-19 pandemic, tariffs, the war in Ukraine, and now, the war in Iran.
Asked about the main drivers of the recent inflation surge, Kashkari said there was “some tailwind from what was left over before,” but he attributed the current surge to energy and fertilizer prices.
“Those inputs do affect other categories as well, and so one of the things I’m going to be looking for is, when do we see energy prices affecting the broader economy and inflation in the broader economy.”
The Minneapolis-based Kashkari was also said that if AI really does lead to sustained higher productivity, higher rates could be sustained as the economy is so productive.
However, he also cautioned that the impact is currently hard to judge and, as such, would need to be observed to see how AI translates into sustained higher productivity.
Bullish on AI Prospects
“I talk to businesses all the time, big businesses, especially in America. All tell me that they’re using it, they’re finding useful ways of putting it to work to become more productive, or to give them capabilities they didn’t previously have,” he said.
“I’m bullish on the long-term prospects of AI, but what are the short-term implications for monetary policy, or even the long-term implications? I think it’s still too soon to know.”
Kashkari made remarks as the central bank starts a new chapter under Warsh, who succeeded Jerome Powell earlier this month.
One of Warsh’s longstanding criticisms of the Fed has been its use of forward guidance, including the so-called “dot plot” that shows anonymous interest-rate projections from the central bank’s 19 policymakers.
Kashkari said he has known Warsh for a long time, and he said he welcomed a fresh discussion about how the Fed communicates with markets and the public.
“I don’t love the fact that I have to fill out the dot plot, because the future is so uncertain,” Kashkari said.
