Minneapolis Federal Reserve President Neel Kashkari said Wednesday that he was wrong to think inflation would prove “transitory” last year, and said more rate hikes are needed this year to keep things low. price pressure.
“While I believe it is too early to state that inflation is rising, we are seeing increasing evidence that it may be,” Kashkari wrote in an essay published Wednesday. “In my view, however, it is appropriate to continue raising rates for at least the next few meetings until we are confident that inflation has picked up.”
Inflation as measured by the consumer price index rose to 7.1% last year in November, from a peak of 9.1% in June but well above the Fed’s 2% target.
In diagnosing why he got inflation wrong last year, Kashkari argued that he and others at the Fed made two key mistakes.
“To be clear, I am firmly on ‘Team Transitory,’ so I will not throw stones,” Kashkari wrote.
“But many of us – those inside the Federal Reserve and the majority of forecasters outside – have collectively made the same mistakes in, first, being surprised when inflation rose as it did and, second, in thinking that the inflation will fall quickly.”
Kashkari wrote the Fed’s models don’t capture disrupted supply chains and post-pandemic demand surges, noting that the Fed’s models tend to focus only on changes in inflation expectations. and gaps in the labor market to explain the dynamics of inflation.
Comparing the rise in inflation to the surge pricing that Uber saw during the rainstorm, Kashkari said the economy saw a surge in demand last year without a resulting increase in supply, which Kashkari called “surge pricing inflation.”
Kashkari also said that citing economic “shocks” such as successive waves of COVID-19, the war in Ukraine, and fiscal stimulus does not absolve the Fed of its responsibility to keep inflation under control.
“I think the root of our miss is that our models are not currently equipped to predict the surge in price inflation that we are experiencing,” Kashkari wrote.
Another 1% to go
The Fed’s median forecast published last month called for rates to rise to 5.1% by the end of this year.
But Kashkari warned that the Fed may not know if that level is enough to bring down inflation, and suggested officials may still need to raise rates higher.
Kashkari saw the Fed raising rates by a full percentage point from the current level of 4.25%-4.5% to a level of 5.4% and then hitting the pause button.
Notably, Kashkari is a voting member of the FOMC in 2023, meaning his more hawkish policy views will register one vote at the central bank’s eight scheduled policy meetings this year.
“Once we see the full effects of the tightened policy, we can determine whether we should go higher or just stay at higher levels longer,” he wrote. “To be clear, at this stage any sign of slow growth that continues to increase inflation in the longer term warrants, in my view, taking the policy rate that could be more tall.”
Kashkari said he would only consider cutting rates once he is convinced inflation is well back to 2%.
“Given the experience of the 1970s, the mistake the FOMC must avoid is cutting rates prematurely and then raising inflation again.”
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