Fed’s Kashkari against price hikes at the very least by 2023

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Minneapolis Federal Reserve President Neel Kashkari said Friday he wanted to keep the Federal Reserve’s short-term interest rate near zero until at least the end of 2023 so that the labor market can return to its pre-pandemic strength.

“The vast majority of Americans want to work, and I’m not ready to write them off – and I want to give them the chance to work,” Kashkari told Reuters in his first public comment since the Fed’s political session ended earlier this week. “As long as inflation expectations stay anchored … let’s be patient and really get maximum employment.”

Kashkari’s remarks show that he is in an increasingly restrictive Fed in a determined minority that closed a two-day meeting on Wednesday with an unexpected result: Given rising inflation, most Fed politicians now see a reason to start rate hikes earlier.

Three months earlier, the clear majority of politicians were in favor of an unchanged level of borrowing costs; On Wednesday, the central bank’s quarterly economic forecast (SEP) summary showed that 11 out of 18 Fed politicians had planned at least two quarter-point rate hikes by the end of 2023.

“I still don’t have any increases in the SEP forecast horizon because I think it will be some time before we really hit maximum employment and I believe these higher inflation levels will be temporary,” Kashkari said in an interview with Reuters.

In the interview, Kashkari said he believes that higher prices will be driven by an economy reopening and will subside as supply restrictions wear off.

With employment still at least 7 million jobs below pre-pandemic levels, he said “the job market is still in a deep hole”. if not beyond.

‘Very neat way’

However, Kashkari showed little discomfort with the Fed’s decision this week to open a discussion on when and how to reduce their monthly government bond and mortgage-backed securities (MBS) purchases of $ 120 billion, the first step in moving away of the exceptional economic support that Kashkari believes is still needed.

“I think (Fed Chairman Jerome Powell) is leading us in a very orderly fashion on a path to have the discussion and look at the data and make those adjustments carefully,” he said.

Once the Fed determines that it is time to scale back its asset purchase program, Kashkari expects to follow the same plan as in 2014, when the Fed scaled back its MBS and Treasury purchases at a steady, predictable pace; A faster reduction in MBS purchases, as suggested by some, would have only a modest cooling effect on the hot home market, he said.

But for Kashkari at least, it will likely take well beyond September to have enough data to judge whether the labor market has made enough progress to warrant a change.

The schools will be open again by autumn, the risk of Covid-19 infection has hopefully decreased, and the special pandemic unemployment benefit has expired. While this should set the stage for more Americans to return to the job market, it could take longer to see a difference in wages and labor force participation, both crucial indicators of labor market strength.

His assessment of the labor market will color his assessment of the inflation data.

If the labor supply improves less than he expected, he may need to reconsider his assessment of full employment and thus how close the labor market is to that goal and whether the rise in inflation will stop, Kashkari said on the verge of becoming persistent.

“The bar is very high for me to get this result,” he said.

At least some of Kashkari’s colleagues might already be there, however, if the “dot plot” of Fed rate hike expectations published as part of the SEP is a guideline. They show that at least seven policymakers expect a rate hike in the next year, a number that includes St. Louis Fed President James Bullard.

“It should be an instrument that offers cautious forward guidance,” said Kashkari of the “Dot Plot”.

“It was ultimately a tool that provided aggressive forward guidance … I continue to believe that we should just kill the dot plot.”

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