Minneapolis Federal Reserve Chairman Neel Kashkari said Wednesday he was wrong to think inflation would prove “transient” last year, and said more rate hikes would be appropriate this year to continue to reduce price pressures.
“While I think it’s too early to definitively declare that inflation has peaked, we are seeing growing evidence that it may have,” Kashkari wrote in an essay published Wednesday. “In my view, however, it will be appropriate to continue raising rates at least in future meetings until we are confident that inflation has peaked.”
Inflation as measured by the consumer price index rose 7.1% year-on-year in November, down from a peak of 9.1% in June, but still significantly above the Fed’s 2% target.
In diagnosing why he was wrong about last year’s inflation, Kashkari argued that he and others at the Fed made two key mistakes.
“To put it bluntly, I was solidly in ‘Team Transitory,’ so I’m not throwing stones,” Kashkari wrote.
“But many of us – those in the Federal Reserve and the vast majority of outside forecasters – made the same mistakes together in, first, being surprised when inflation rose as much as it did and, second, , assuming that inflation would fall rapidly.”
Kashkari wrote that the Fed models did not account for halted supply chains and post-pandemic demand increases, noting that Fed models tend to focus only on changes in inflation expectations. and labor market gaps to explain inflation dynamics.
Comparing the rise in inflation to the price spike seen on Uber during a rainstorm, Kashkari said the economy saw a surge in demand last year without an increase in supply, which which Kashkari described as “rising price inflation”.
Kashkari also said that citing “shocks” to the economy like successive waves of COVID-19, the war in Ukraine and fiscal stimulus does not absolve the Fed of responsibility for missing the mark. ‘inflation.
“I think the root of our failure is that our models are not currently equipped to predict the price inflation surge we are experiencing,” Kashkari wrote.
Still 1% to go
The Fed’s median forecast released last month calls for a rate hike to 5.1% by the end of the year.
But Kashkari warned that the Fed may not know whether that level is high enough to bring inflation down, and suggested officials may still need to raise rates.
Kashkari sees the Fed hike rates a full percentage point from the current level of 4.25%-4.5% to a level of 5.4% and then hit the pause button.
Notably, Kashkari is a voting member of the FOMC in 2023, meaning his more hawkish view of politics will be recorded by a 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 just stay at this peak for longer,” he wrote. “To be clear, in this phase, any sign of slow progress that keeps inflation high for longer will, in my view, justify raising the policy rate potentially much higher.”
Kashkari said he would only consider cutting rates once he was confident inflation was close to returning to 2%.
“Given the experience of the 1970s, the mistake the FOMC must avoid is to cut rates prematurely and then push inflation back up.”
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