Fed’s Kashkari explains why he calls for higher rates

On Wednesday, Fed’s Neel Kashkari said he was wrong to have thought that inflation would prove “transitory” last year, and called for more rate hikes, suggesting that this will be appropriate in 2023 to continue bringing down price pressures.

“While I believe it is too soon to definitively declare that inflation has peaked, we are seeing increasing evidence that it may have,” Kashkari said, adding that “In my view, however, it will be appropriate to continue to raise rates at least at the next few meetings until we are confident inflation has peaked.”

Inflation as measured by the consumer price index rose 7.1% over the prior year in November, down from a peak of 9.1% in June but still significantly higher than the Fed’s 2% target.

In diagnosing why he got last year’s inflation wrong, Kashkari argued he and others at the Fed made two key errors. “To state clearly, I was solidly on ‘Team Transitory,’ so I am not throwing stones,” Kashkari added.

Kashkari wrote the Fed’s models did not capture stopped-up supply chains and surges in demand following the pandemic, noting Fed models tend to focus solely on changes in inflation expectations and gaps in the job market to explain inflation dynamics.

Key Quotes

Key takeaways
“Appropriate to continue interest rate hikes at least at the next few meetings until confident inflation has peaked.”

“Increasing evidence that inflation may have peaked.”

“Fed should then hold target interest rate and says his forecast is that would be at 5.4%.”

“Won’t know if that is high enough until Fed pauses for a reasonable period of time.”

“Once Fed allows for policy lag effects, can then assess if rates need to go higher or remain at peak for longer.”

“In this phase, any sign of slow progress on lowering inflation will require taking policy rate potentially much higher.”

“Fed can consider cutting rates only when convinced inflation well on its way back down to 2% target.”