Minneapolis Federal Bank President Neel Kashkari has claimed that inflation may still be transitory.
The next Federal Open Market Committee (FOMC) policy meeting is more than a month away.
However, U.S. central bank officials are providing insights into the Federal Reserve’s plans, inflation, and the broader economy.
On Wednesday, the message from multiple officials was that slashing inflation to its pre-pandemic level is the chief priority for the Fed, despite the risk of a recession.
Kashkari acknowledged that the Fed reacted to inflation too slowly last year.
According to the Fed official, the hesitance was due to policymakers believing that higher prices would be transitory.
He now thinks that the central bank needs to respond with urgency because 40-year high inflation is spreading throughout the national economy.
Kashkari said that inflation might still turn out to be transitory.
But he later conceded that it could take several years before the institution can bring inflation back down to the conventional 2 percent target rate unless a recession strikes the economy.
“The longer inflation is high, and the more it spreads out across sectors of the economy, the more likely it is going to be embedded in the fabric of the economy,” he told the annual conference of the Journal of Financial Regulation at Columbia Law School in New York on Wednesday.
This was a similar answer he gave to The New York Times.
He told the newspaper last week that “we are a long way away from” lowering inflation to 2 percent.
When asked about a potential recession, Kashkari purported that navigating a soft landing is still possible.
He also shot down the financial markets that are suggesting the Fed could cut interest rates in 2023 to spur economic growth.
“Some financial markets are indicating they expect us to cut interest rates next year,” he said.
“I don’t want to say it’s impossible, but it seems like that’s a very unlikely scenario right now given what I know about the underlying inflation dynamics.
“The more likely scenario is we would continue raising (interest rates) and then we would sit there until we have a lot of confidence that inflation is well on its way back down to 2 percent.”
According to Kashkari, the more likely scenario is that the Fed lifts the benchmark fed funds rate and allows it to sit there until inflation eases.
In an interview with Reuters on Wednesday, San Francisco Fed Bank President Mary Daly explained that it would be “reasonable” for the Fed to pull the trigger on a 50-basis-point rate hike during next month’s FOMC policy meeting.
However, she cautioned that inflation could still show no indications that it is slowing down, so a three-quarter-point increase “might be more appropriate.”
“I start from the idea that 50 would be a reasonable thing to do in September because I believe I’m seeing evidence in my contact conversations, and in the observations of the world I see, that there are some bright spots for me,” Daly said.
According to the CME FedWatch Tool, the financial markets are nearly split on the probability of either a 50-basis-point or 75-basis-point move during the September meeting.
Meanwhile, Daly explained that the financial markets have reacted to the Fed’s tightening campaign, but she has yet to see data showing the central bank’s latest efforts seeping into the broader economy.
“We have a lot in the pipeline of tightening, but we have yet to see the slowdown fully reveal itself,” she stated.
Overall, Daly echoed Federal Reserve Chair Jerome Powell’s remarks and noted that the June dot-plot is a “reasonable guide” to anticipating the institution’s actions moving forward.
She also thinks that the Fed can trim inflation without triggering a deep recession.
St. Louis Fed Bank President James Bullard admitted that the central bank might need to keep interest rates “higher for longer” until there is enough evidence highlighting that inflation is easing.
“We’re going to need to see convincing evidence across the board, headline and other measures of core inflation, all coming down convincingly before we’ll be able to feel like we’re doing enough,” Bullard told CNBC on Wednesday.
Bullard noted that he supports a strategy of “front-loading” large rate hikes, with the objective of ending the year at a range of 3.75 percent to 4 percent.
“We still have some ways to go here to get to restrictive monetary policy,” he said.
“I’ve argued now with the hotter inflation numbers in the spring, we should get to 3.75 percent to 4 percent this year.
“Exactly whether you want to do that at a particular meeting or some other meeting is a great question. I’ve liked front-loading. I think it enhances our inflation-fighting credentials.”
Last week, Powell suggested that the Fed would raise rates to 3.4 percent by the year’s end and 3.8 percent in 2023.
Bullard also rejected the notion that the United States is in a recession right now.
“With all the job growth in the first half of the year, it is hard to say that there was a recession,” he said.
This comes one day after he told an event at New York University that it is possible for the Fed to bring inflation back down to pre-pandemic levels without igniting a recession.
Richmond Fed Bank President Thomas Barkin expects inflation will recede, but “not immediately, not suddenly, and not predictably.”
Although Barkin believes recession worries are “a little inconsistent” with the current labor market, he told a Blue Ridge Community College event in Virginia on Tuesday that “there is a path to getting inflation under control, but a recession could happen in the process.”
Still, Barkin is confident that the central bank will eventually restore price stability.
“[W]e have the tools, and we have the credibility with households, businesses, and markets required to deliver that outcome over time, and we will,” he stated.
During last week’s post-FOMC press conference, Powell told reporters that the Fed could consider another “unusually large” rate increase during the September meeting as officials comb through a broad array of data, including inflation, employment, and consumer spending.
By the time next month’s much-anticipated meeting convenes, two consumer price index (CPI) and jobs reports will be published.
The two-day policy meeting begins on Sept. 20.
