Fed's Kashkari doesn't rule out a rate hike

By Greg Robb

Big question is whether inflation is settling at 3%, which would be 'not good enough,' Minneapolis Fed president says

Minneapolis Fed President Neel Kashkari said Tuesday that he can't rule that the next move from the central bank will be a rate hike.

"The bar to raising is quite high, but it is not infinite," Kashkari said in a talk at the Milken Institute 2024 Global Conference in Beverly Hills, Calif.

Kashkari said he would support a hike if inflation starts to look entrenched.

Kashkari added quickly that a rate hike wasn't his base case.

He said the most likely scenario would be that the Fed will "stay put for an extended period of time" and continue to hold rates at the current 5.25%-5.5% level "and allow them to bite."

The Fed has kept rates at this level since last July.

In an essay published earlier Tuesday, Kashkari said the biggest question facing the U.S. central bank is whether inflation will continue its downward trend or settle at around a 3% level, in which case monetary policy may have to be tightened further.

If inflation has stalled, it suggests that the Fed "has more work to do," Kashkari said.

Kashkari said he had penciled in two rate cuts this year in the "dot plot" prepared for the Fed's March meeting. He said he wasn't sure how where his dot would be in June, saying he might pencil in two, one or zero moves.

"My colleagues and I are of course very happy that the labor market has proven resilient, but, with inflation in the most recent quarter moving sideways, it raises questions about how restrictive policy really is," he said.

Kashkari said the April job report, which showed job growth slowed to a six-month low of 175,000 was "not a soft report." He said the economy seemed to be in a "good place" with steady growth.

In the past, when the Fed has tightened monetary policy considerably, the housing market has suffered, but in this cycle, residential investment has now grown 5% over the past year, Kashkari said.

This raises a host of questions, he added.

Perhaps the most important one is whether the Fed has misjudged how tight its policy actually is.

The Fed has raised its benchmark interest rate to well above the 2.6% rate that marks the Fed's formal estimate of "neutral," meaning it won't dampen or accelerate demand.

There is some thought that the Fed has misjudged the level of rates that would be "neutral" for the economy, Kashkari said.

"If policymakers and market participants are misperceiving the neutral policy rate, that could explain the constellation of data we are observing," he said.

Overall economic activity, consumer spending and the labor market "have proven surprisingly resilient" despite interest rate rises, he said. That's not to say policy is having no impact. He noted that some consumers are feeling stress from increased borrowing costs.

Kashkari won't be a voting member of the Fed's interest-rate committee until 2026. His comments put him on the hawkish end of the policy spectrum of Fed officials.

The 10-year Treasury yield BX:TMUBMUSD10Y fell 5 basis points to 4.44% in trading on Tuesday.

The Minneapolis Fed president said it seemed like financial markets "are wired for exuberance."

"You have three negative inflation prints in a row and the market started to take that on board and get a little bit concerned. And they you had one somewhat positive job report and then they're back to the races," he said. He said that is a concern because it might be that markets are signaling that the Fed is not tamping down demand in the economy.

-Greg Robb

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05-07-24 1251ET

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