Key Takeaways:
Minneapolis Fed President Neel Kashkari said bringing down inflation from 3.8% remains his top priority, warning that five years of elevated prices risk unanchoring expectations if the central bank does not act decisively.
"I am focusing heavily on inflation. The labor market is in decent shape right now, while inflation is simply much too high," Kashkari said Thursday at the Bank of Japan-IMES Conference in Tokyo.
Headline inflation stood at 3.8% in April, more than double the Fed's 2% target, with core CPI at 2.8%. The fed funds rate has been held at 5.25% to 5.50% since July 2023 after 525 basis points of hikes. Kashkari dissented against the Fed's April decision to maintain dovish guidance that the next move could be a cut, arguing instead for neutral language.
The longer inflation stays elevated, the greater the risk that expectations become unanchored, Kashkari said, adding that would force the Fed to respond even more aggressively. Markets are now pricing in a potential rate hike in October as the Iran conflict pushes energy prices higher, though Kashkari said it is "far too soon" to predict the timing of the next move.
Kashkari attributed the current inflation surge to energy and fertilizer prices tied to the war in Iran, warning that the "inflationary shockwave" could persist even if a quick peace deal is reached. Supply chains would take months to normalize, he said, while countries replenishing oil reserves would keep upward pressure on prices.
The conflict adds to what Kashkari described as five years of high inflation globally, fueled by the pandemic, tariffs, the war in Ukraine, and now the Middle East. He said the cumulative effect shapes his willingness to "look through what otherwise should be a temporary supply shock."
Kashkari said the Fed should maintain neutral guidance that signals rates could move in either direction depending on incoming data. Since his April dissent, he noted, "most of the data has said the inflationary risks are higher, not lower."
Overnight index swaps currently price roughly a 45% probability of a quarter-point hike by October, according to CME FedWatch data. The last time the Fed raised rates was July 2023, when it delivered a 25-basis-point increase to the current 5.25% to 5.50% range. That tightening cycle, which began in March 2022, was the most aggressive in four decades.
Beyond monetary policy, Kashkari flagged risks from the U.S. fiscal trajectory, describing the long-run debt path as "unsustainable." While he said there are no clear signs of an imminent debt-driven crisis, he warned that "sudden moves in financial markets can be destabilizing."
The comments come as the 10-year Treasury yield has climbed on concerns about persistent inflation and rising supply. Kashkari contrasted the U.S. position with Japan's, noting that Japan may be safer despite its large debt because most of it is held domestically.
On the Fed's leadership under new Chair Kevin Warsh, Kashkari said he expects committee members to vote based on their own reading of the economy, with the best ideas ultimately persuading the group.
This article is for informational purposes only and does not constitute investment advice.
