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A top Federal Reserve official has called for interest rates to stay on hold for an “extended” time, saying lowering borrowing costs before inflation was under control would put the foundations of US prosperity at risk.
Neel Kashkari, Minneapolis Fed president, also told the FT podcast The Economics Show that Americans’ “visceral” hatred of inflation meant that some people would prefer a recession to a jump in prices.
“The economy is, in the US, quite strong, the labour market is strong, inflation is coming down and many, many people are deeply unhappy about the status of the economy,” he said. “I think it’s because of the high inflation that they’ve experienced.”
Kashkari’s remarks were made on May 27, ahead of the start of the blackout period for the Federal Open Market Committee’s June 12 policy vote. The podcast went live on Monday.
The Fed is expected to keep rates on hold at a 23-year high range of 5.25 to 5.5 per cent, with rate-setters saying they want more evidence that headline personal consumption expenditures inflation is on course to hit their 2 per cent goal. Headline PCE for April was 2.7 per cent.
“Right now, my best guess is we would leave [rates] here for an extended period of time until we get a lot more data to convince us, one way or the other, is underlying inflation really on its way down,” Kashkari said.
He added that the strength of the US economy afforded US rate-setters “the luxury of time to get more evidence” before concluding whether or not the sharp decline in inflation during the second half of 2023 had now stalled entirely.
While the Minneapolis Fed president does not hold an FOMC vote this year, the views of all committee members are considered during deliberations. The former Treasury official’s remarks have cast him as one of the more hawkish members of the committee.
However, after a series of poor inflation readings earlier this year, most US rate-setters would prefer to leave interest rates higher for even longer and risk lower growth, rather than see their credibility dented by a revival in price pressures.
“Anchoring of inflation expectations has been a foundation of a lot of the economic prosperity that America has enjoyed in the ensuing 40 years,” said Kashkari. “I would be very cautious about putting that at risk.”
High borrowing costs — and the persistent inflation responsible for them — is causing consternation for US President Joe Biden as he campaigns for a second term in the White House.
While unemployment is low and post-pandemic growth has been faster in the US than anywhere else in the G7, the consumer price index is up by more than 19 per cent since Biden took office.
Kashkari said his experience in talking to small businesses, labour groups and workers had taught him that American people “really viscerally hate high inflation”.
“[A labour leader] said her members are used to dealing with recessions, and the way they get through a recession is they rely on friends and family . . . But [she said] high inflation affects everybody — there’s no one I can lean on for help, because everyone in my network is experiencing the same thing I’m experiencing,” he said.
You can listen to this conversation on The Economics Show with Soumaya Keynes, a new podcast from the FT bringing listeners a deeper understanding of the most complex global economic issues in easy-to-digest weekly episodes. Subscribe to Soumaya’s show on Apple, Spotify, Pocket Casts or wherever you listen.
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