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Minneapolis Federal Reserve President Neel Kashkari, a leading policy dove on the central bank, pushed back on the views of many hawkish commentators that the central bank is way behind in the battle to control inflation.
On Wednesday, the Fed raised its benchmark interest rate by a half-a-percentage-point to a range of 0.75%-1%. With consumer price inflation running at 8.5%, the highest in 40 years, hawks have been arguing that the Fed has to get its policy interest rate up sharply before it will start to push down inflation.
“People say ‘you’ve only raised interest rates 75 basis points and inflation is a 7% – you’re way out of line’,” Kashkari said, during a discussion at the Carlson College School of Management.
This argument is a “misunderstanding” of how monetary policy works,” he said.
Read Kashkari’s paper: Policy Has Tightened a Lot. Is It Enough?
What hawks miss is that the key interest rate is not the Fed’s benchmark rate that is below 1% but longer-term interest rates.
Since the Fed starting talking tough about inflation this year, mortgage rates have rocketed up above 5% and the 10-year Treasury note
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has breached 3%.
In his talk and an accompanying essay put on the Minneapolis Fed’s website, Kashkari said the Fed’s forward guidance has succeeded in pushing longer-term rates, adjusted for inflation, up close to a neutral level.
He said the key going forward was for the Fed to follow though on Fed Chairman Jerome Powell’s pledge of more rate hikes until the benchmark rate is in the neighborhood of 2%-3%.
But Kashkari said he was open to the need to do more.
“Have we moved them [long-term rates] enough? I don’t know,” the Minneapolis Fed president said.
A lot depends on what happens with supply issues, he added.
“If we don’t get any help in terms of supply chains normalizing, then we’re going to have to do more with monetary policy,” Kashkari said.
“We can’t boost supply with monetary policy – but we can bring down demand,” he added.
So, in order to bring inflation back in check, the Fed will have to bring demand down if supply chains don’t improve, he noted.
“I’m confident we have the commitment to do what we need to do to bring inflation down. I just hope we can some help from the supply side,” he said.
During the question-and-answer session, an alumnus of Carlson, who works in supply management, said leaders in his industry fear that firms have ordered too much supply just to make sure they get what they need to build their products. One day soon, all of the inventory that has been ordered is going to arrive at the same time and there will be a sudden excess of inventory and a drop in prices, possibly leading to a recession.
Asked for his perspective, Kashkari replied: “That makes sense. We’re in uncharted territory and how these things sort themselves out is not going to be seamless.”
