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Warnings that U.S. inflation is about to surge are not supported by any evidence, and are tantamount to “ghost stories,” said Minneapolis Federal Reserve President Neel Kashkari on Friday.
These has been talk since 2008 that once inflation started to climb, it would accelerate, forcing the Fed to slam on the brakes by raising its policy interest rate sharply, Kashkari said, in an essay posted on his regional bank’s website.
These theories are similar to ghost stories because there is no evidence that they are true yet they can’t be ruled out, he said.
Some economists worry that the consumer price index is signaling higher inflation.
The CPI is up 6.3% annualized over past three months, the highest rate since 2008. Core CPI, which excludes food and energy prices is up 5.1%, the highest since 1991. Core commodities are up 8.1%, the highest since 1982.
Stepping back, higher inflation would be a “high-class problem” for the Fed, Kashkari said.
That’s because the Fed knows how to handle higher inflation – the problem is the central bank has limited tools to combat low inflation.
Persistent low inflation is posing challenges to advanced economies around the world, Kashkari noted.
This week, the Fed announced the final pieces of its strategy to avoid falling into the quicksand of low inflation.
Read:The Fed’s last stand: the battle to stay potent
The FOMC said it would keep interest rates close to zero until the labor market achieves maximum employment and inflation has risen to its 2% target “and is on track to moderately exceed 2% for some time.”
Kashkari dissented from the Fed’s new forward guidance at its policy meeting on Wednesday. He proposed simpler language that the FOMC “expects to maintain the target range until core inflation has reached 2% on a sustained basis.”
Kashkari said that he defined “sustained basis” in this environment as lasting roughly a year.
Kashkari said his alternative forward guidance was stronger than the statement adopted.
The Minneapolis Fed President said the FOMC didn’t need to mention employment in its forward guidance and including it risks underestimating slack in the labor market.
Under his proposal, “we would only lift off once we had demonstrated that we really were at maximum employment because core inflation would have had to actually hit or exceed 2% on a sustained basis in order to lift off,” he said.
