Fed’s Kashkari sees no signs of ‘resurgent inflation’
The coming wave of unemployment, not inflation, is what should keep Americans up at night, according to Minneapolis Federal Reserve Bank President Neel Kashkari.
“The balance of risks have shifted from higher inflation towards maybe higher unemployment,” Kashkari said in a recent interview.
“The labor market still looks strong, we want to keep it that way,” he added, likely in reference to the Fed’s decision to lower interest rates in September.
Like most Fed officials, Kashkari doesn’t think that aggressive rate cuts will trigger another bout of inflation.
“I am not seeing signs of resurgent inflation,” he said, adding that moderating rent price gives policymakers “confidence that housing inflation will come down over the next 12 to 24 months.”
For the last three years, housing has been a major contributor to inflation, and even now, shelter costs continue to rise at double the rate of headline inflation.
August marked the 29th consecutive month that housing costs have risen by at least 5%. At the same time, the consumer price index (CPI) fell to 2.5%
While inflation may be moderating, American paychecks are still hardly catching up with rising costs of living.
This means Americans who are struggling to pay rent or afford basic necessities are unlikely to find much reassurance in Kashkari’s comments.
Surprisingly candid
In a separate interview last week, Kashkari was surprisingly candid about the future path of inflation, alluding to a never-ending cycle of price increases.
“I’m just going to be clear: we cannot get those prices to come back down,” Kashkari said in reference to the sticker shock many Americans still get at the grocery store.
“What we’re hoping is we can stop them from increasing from here—that’s not a very satisfying answer,” he said.
This sticker shock remains fresh in the minds of millions of Americans, who expect higher prices to be the norm moving forward.
According to the New York Fed, consumers’ one-year inflation expectations have held steady at 3% in recent months. Meanwhile, inflation expectations five years from now are 2.8%.
Both figures are much higher than the Fed’s target inflation rate of 2%.
Some experts warn that the Fed may have shot itself in the foot by cutting interest rates too aggressively in September. According to BlackRock, central bankers can expect some nasty surprises in the inflation data in the final quarter of 2024.
“We think inflation will prove sticky and could surprise the Fed again as it did earlier this year,” BlackRock strategists said in a recent note.
Some sources of inflation, such as the surging federal deficit, are beyond the central bank’s immediate control.
For these reasons, Fed Governor Michelle Bowman warned that central bankers shouldn’t declare victory over inflation too prematurely. In her view, aggressive rate cuts may unnecessarily stoke demand in the economy, creating an inflationary spiral that’s harder to recover from.
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