Kashkari of the Federal Reserve Bank of Minneapolis explains why it lags behind on inflation, and calls for higher interest rates

Minneapolis Federal Reserve Chairman Neel Kashkari said Wednesday that he was wrong to think inflation would “temporarily” stabilize last year, and said further rate hikes would be appropriate this year to further reduce price pressures.

“While I think it is too early to definitively declare that inflation has peaked, we are seeing mounting evidence that it may be.” wrote in an article published on Wednesday. “In my view, it would be appropriate to continue to raise interest rates at least for the next few meetings until we are sure that inflation has peaked.”

Inflation as measured by The Consumer Price Index rose 7.1% year-on-year in Novemberdown from a peak of 9.1% in June but still well above the Fed’s 2% target.

In diagnosing why last year’s inflation was wrong, Kashkari said he and others at the Fed made two major mistakes.

Kashkari wrote: “To state clearly, I was strong on ‘Team Transitory’, so I’m not throwing stones.

“But many of us—those inside the Fed and the vast majority of outside forecasters—have all made the same mistakes in, first, being surprised when inflation rose as much as it did, and second, in assuming that inflation would fall quickly.”

Kashkari wrote that the Fed’s models did not capture stalled supply chains and increases in demand in the aftermath of the pandemic, noting that the Fed’s models tend to focus only on changes in inflation expectations and gaps in the labor market to explain inflation dynamics.

Minneapolis Federal Reserve Bank President Neel Kashkari speaks during an interview in New York, US, March 29, 2019. REUTERS/Shannon Stapleton

Minneapolis Federal Reserve Bank President Neel Kashkari speaks during an interview in New York, US, March 29, 2019. REUTERS/Shannon Stapleton

Comparing the rise in inflation to the price hike Uber experienced during a rainstorm, Kashkari said the economy saw an increase in demand last year without a resulting increase in supply, which Kashkari called “sudden pricing inflation.”

Keshkari also said that citing “shocks” to the economy such as successive waves of COVID-19, the war in Ukraine and fiscal stimulus does not absolve the Fed of responsibility for lost inflation.

“I think the main reason we fail is that our models are not currently equipped to predict the high price inflation that we are seeing,” Kashkari wrote.

Another 1% remaining

the The Fed’s average forecast was published last month Calls to raise prices to 5.1% by the end of this year.

But Kashkari warned that the Fed may not know if that level is high enough to bring down inflation, and noted that officials may still need to raise interest rates.

Kashkari sees the Fed raising rates a full percentage point from the current 4.25%-4.5% level to the 5.4% level and then hitting the pause button.

Notably, Kashkari is a voting member of the Federal Open Market Committee in 2023, meaning his more hawkish view on policy will register by vote at the central bank’s eight scheduled policy meetings this year.

“Once we see the full effects of the tightening policy, we can then assess whether we need to go higher or simply stay at that peak level for a while longer,” he wrote. “To be clear, at this point, any sign of slow progress that keeps inflation higher for longer will warrant, in my view, likely raising the policy rate much higher.”

Kashkari said he would only consider cutting interest rates if he was convinced that inflation was on its way back to 2%.

“Looking at the experience of the 1970s, the mistake the FOMC should avoid is cutting interest rates prematurely and then sending inflation back up again.”

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