The chairman of the Minneapolis Federal Reserve recently predicted that the Federal Reserve's most likely option is to keep policy interest rates stable for a longer period of time. If inflation declines again, or if a significant weakening of the US labor market is found, these may all cause the Federal Reserve to cut interest rates. Interest rate hikes aren't the most likely scenario, but they can't be ruled out either.
On Tuesday, Minneapolis Federal Reserve Chairman Kashkari pointed out in a recent article on the Federal Reserve website that recent US inflation data raised questions about whether monetary policy is restrictive enough to fully return inflation to the Fed's 2% target. “My colleagues and I are certainly very happy that the labor market is showing elasticity, but with inflation trending sideways in the most recent quarter, this raises questions about how restrictive the policies really are.”
In response, Kashkari pointed out that ongoing housing inflation indicators show that America's neutral interest rate may actually be higher in the short term, which may mean that the Federal Reserve needs to do more work to curb inflation. “Given that housing is a key channel for monetary policy to influence the economy, its flexibility raises questions that policymakers and the market misevaluate neutral interest rates, at least in the short term.” Kashkari raised its forecast for long-term neutral interest rates from 2% to 2.5%. Neutral interest rates refer to the level of interest rates that neither limit nor stimulate the economy.
In fact, some of Kashkari's colleagues have also raised their neutral interest rate forecasts. Judging from the latest economic forecasts of US Federal Reserve officials released in March, the median forecast for long-term federal funds interest rates rose to 2.6% from the previous 2.5%.
Kashkari emphasized that the Federal Reserve must base its policy on neutral interest rates. However, the current uncertainty about neutral interest rates poses challenges to policy makers.
Kashkari predicts that the most likely option for the Federal Reserve's FOMC is to keep policy interest rates stable for a longer period of time. If inflation declines again, or if a significant weakening of the US labor market is found, these may all cause the Federal Reserve to cut interest rates. However, Kashkari mentioned that last Friday's non-farm payrolls report was only weaker than expected; in fact, it was not weak.
Kashkari believes that an interest rate hike is not the most likely situation, but it is impossible to rule out such a possibility. However, if inflation becomes entrenched, the Federal Reserve may continue to raise interest rates if necessary.
Kashkari said that it is necessary to see multiple positive inflation reports showing renewed progress in fighting inflation to help the Federal Reserve begin to cut interest rates. He currently anticipates that US inflation will temporarily fluctuate up and down. The price of the new lease contract seems to have risen, which is a bit worrying.
Kashkari did not have the right to vote at the FOMC meeting this year.
Financial blogger ZeroEdge commented that Kashkari's latest opinion was shared by both groups, but its mention of interest rate hikes had a deterrent effect on US stocks on Tuesday.