– But Says ‘Positive Signs’ Let FOMC ‘Take A Little More Time’
– Says FOMC ‘Long Way From Cutting Rates’
– Allows For Nominal Cuts at Some Point To Prevent Inadvertent Tightening of Real Rates
– Warns Of Possible Bank Stress If Fed Has to Keep Raising Rates
By Steven K. Beckner
(MaceNews) – Minneapolis Federal Reserve Bank President Neel Kashkari indicated Tuesday that he is prepared to raise short-term interest rates further to reduce inflation, but suggested there is less urgency to do so, given “positive signs” on inflation.
Kashkari, an erstwhile “dove” who has developed into one of the more hawkish voting members of the Fed’s rate-setting Federal Open Market Committee, said rate cuts are probably a long way off.
However, he did say there could come a time in the next couple of years when the nominal federal funds rate may need to be lowered to prevent the real funds rate from becoming overly tight, assuming inflation continues to diminish.
If the FOMC does have to raise rates further, it could expose new vulnerabilities in the banking system, he warned an APi Group Global Controllers Conference in Minneapolis.
Kashkari’s comments come three weeks after the FOMC resumed raising the federal funds rate following a June pause. The committee raised the policy rate by 25 basis points to a target range of 5.25% to 5.5% — the eleventh rate hike since the Fed left the zero lower bound in March 2022.
The FOMC left the door open to further rate hikes in its July 26 policy statement, reiterating that “additional policy firming … may be appropriate,” depending on how it assesses various factors. Chair Jerome Powell suggested the Sept. 19-20 FOMC meeting will be a “live” one, saying he and his colleagues had not moved to an “every other meeting” schedule and saying he wouldn’t take rate hikes at “consecutive meetings” “off the table.”
If the inflation data are not satisfactory by the next meeting, Powell said the FOMC would “go ahead” and raise rates again. The FOMC could either raise rates again or keep them steady, depending on the data, he said.
Kashkari acknowledged that his reputation has changed from “dove” to “hawk,” but his latest monetary policy comments were nuanced as he responded to a question about whether the Fed has raised rates enough and about when it might lower rates.
He welcomed reductions in the rate of inflation, noting that the price index for personal consumption expenditures (PCE) has fallen to around 3% on a year-over-year basis, but he added that the core PCE at 4.1% is “still too high.”
“We need to get that back down to 2%,” he said. He also mentioned that the labor market remains tight and economic growth “resilient.”
“Now, the good news is that the last couple of inflation readings have been positive,” he said. “They’re suggesting to us that inflation is, in fact, coming down toward our 2% target. I want to see convincing evidence that inflation is well on its way back down to 2%, and then we can allow it some time to run.”
But Kashkari, who has led the Fed’s ninth district since January 2016, took a less aggressive approach to countering inflation than in the past. “We don’t need to get there tomorrow. We can allow it to gradually get there over time.”
“Are we done raising rates?” Kashkari asked, restating the moderator’s question.
“I’m not ready to say that we’re done, but I’m seeing positive signs that say, ‘hey, we may be on our way. We can take a little bit more time to get some more data in before we decide if we need to do more,’” he answered.
As for rate cuts, Kashkari said, “I think we’re a long way from cutting rates, because core inflation is still around 4%. It’s still around twice what our target is, and we need to be confident that it’s going all the way down to 2%.”
However, he went on to say, “there is going to be a dynamic soon, next year sometime,” when the FOMC may need to cut the funds rate to keep it from getting too high in real terms, assuming inflation continues to fall.
Stressing that it is real, not nominal, rates, that impact the economy, Kashkari explained that “if inflation falls and the nominal rate stays the same the real rate goes up. So if we leave our nominal rate where it is and inflation falls that in a sense means we’re still tightening policy because real rates are still climbing.”
“There will come a point in time – we’re not there yet – there will come a point in time when one could reasonably argue ‘hey, maybe we ought to back off the nominal rate just to keep monetary policy at a stable point, not keep tightening,” he continued.
“Could that happen next year?” he asked. “It’s certainly possible, or the year after that, but we have to see how the data come in.”
Kashkari stressed that “what we have to avoid is what happened in the 1970s is that inflation took off; they raised rates; they thought they had beat it; it started to come down, and then it flared back up even higher, and then they had to chase it higher, and they went through that a few times.”
“Ultimately it led to very, very deep recession to get inflation back down to target,” he recalled. “We want to avoid that really bad outcome.”
Referencing the series of regional bank failures in March, Kashkari said that “right now it seems like things are quite stable.”
However, he added, “the risk is if inflation is not completely under control and we have to raise rates further form here, (banks) might face further losses .…”
There is “not an all clear, because we have not gotten inflation all the way back down to 2%.” How much higher the Fed needs to raise rates to conquer inflation will determine whether banks face more stress, he said.
Since their July move, other policymakers have made divergent comments about the future rate path. On one hand, Governor Michelle Bowman said she “expect(s) that additional increases will likely be needed to lower inflation to the FOMC’s goal.”
By contrast, Philadelphia Fed President Patrick Harker asserted, “Absent any alarming new data between now and mid-September, I believe we may be at the point where we can be patient and hold rates steady and let the monetary policy actions we have taken do their work.” He added, “Should we be at that point where we can hold steady, we will need to be there for a while.”
New York Fed President John Williams took a more ambivalent, middle view, ruling higher rates neither out nor in. “To me, the debate is really about: Do we need to do another rate increase? Or not? Now, that could change, depending on the data,”
The FOMC vice chair added, “I think we’re pretty close to what a peak rate would be, and the question will really be — once we have a good understanding of that, how long will we need to keep policy in a restrictive stance, and what does that mean?”
Some key pieces of July data have arrived since the FOMC raised rates last month. Although non-farm payrolls grew less than expected, the unemployment rate fell and wage gains grew at a faster 4.4% annual pace.
The consumer price index reversed course and rose 3.2% year-over-year, two tenths higher than in June. The more closely watched core CPI pace slowed from 4.8% to 4.7% — still far above the Fed’s 2% target.
Meanwhile, recession fears have diminished amid relatively robust economic activity.
Just before Kashkari spoke, the Commerce Department reported a larger than expected 0.7% rise in July retail sales rose 0.7% (1.0% excluding auto and gasoline sales).