According to Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, American consumers are so fed up with rising prices that they would rather see the economy shrink than see their costs rise.
As a result, Kashkari, who has led the organization since January 2016, had bad news for Wall Street: He doesn’t believe a cut is coming anytime soon.
Financiers have been waiting for Jerome Powell’s confirmation as to when rates will start falling from more than two-decade highs.
Many previously believed the process would have already begun by this point in the year, but analysts began to revise their expectations as the CPI data continued to stall.
Inflation remained stubbornly at 3.4% in April – exactly the same as in December.
When the figure is viewed in the longer term, it is an improvement. However, when it peaked at 9.1% in June 2022, it still remains well above the Fed’s 2% target.
While analysts who hoped to lower their forecasts may be disappointed, Kashkari emphasizes that consumers want to see continued control over monetary policy.
“I’ve learned that the American people – and perhaps people in Europe too – really hate high inflation. I mean, I really have a deep-seated hatred of high inflation,” he told the newspaper ‘The Economics Show’ from the Financial Times‘podcast.
Kashkari said those at the bottom of the income spectrum would prefer a recession to continued inflation, acknowledging that this is the opposite of what many economists would prefer.
He explained that this preference among unions is due to the fact that workers have learned to deal with recessions before and can rely on friends and family for support.
Kashkari illustrated, “I lose my job, I lean on my sister, my parents, or my friends, and they help me get through it. But high inflation affects everyone. There is no one I can rely on for help, because everyone in my network experiences the same thing as me.”
‘Remarkably’ resilient
Kashkari, a former aerospace engineer, is more aggressive on how the Fed should continue to handle the base rate going forward.
Although Kashkari will not have a vote on the base rate this year, the committee’s 12 members will consider his thoughts — and he has made clear that he believes the U.S. economy is still relatively healthy.
“In the US, GDP has been remarkably strong, very strong,” he explained. “The labor market has been resilient. Wage growth has been largely resilient. And we see that even the housing market is showing signs of resilience. So when I look at this resilience and economic activity, it does not look like an economy that is under the pressure of very high, very tight monetary policy.”
Currently the base interest rate is around 5.5%, while before the pandemic it was only 0.25%.
Kashkari predicts that the future of the base rate is somewhere in the middle, perhaps around 2.5%.
But he qualified: “That is very uncertain. That will depend, among other things, on what happens to productivity growth. And for example: what impact does AI ultimately have on the economy?”
Indeed, the former Goldman Sachs employee echoed the fear expressed by JPMorgan’s Jamie Dimon that few want to listen to: that the Fed could even raise rates.
“When we look at risks and interest rates, we don’t always look into the future, [we are] we are looking at a range of outcomes,” Dimon told CNBC at the JP Morgan Global China Summit in Shanghai last month.
“Do I think rates can rise a bit? Yes I do. And if they do, will the world be prepared? Not really.”
Kashkari said he believes the base rate will remain at its current level for an extended period of time, or “until we become convinced that inflation is either well on its way back or not.”
If the Fed remains unconvinced, he warned that rates could even rise.
One thing is certain: Kashkari – who previously held senior positions at the US Treasury Department – will not agree with the Fed raising its inflation target from 2% to 3% and putting an end to it.
He explained: “I think that’s a terrible idea because the next time we have a period of high inflation you could say, last time they settled on three, maybe this time they’ll settle on four settle and you will see a gradual unanchoring. of inflation expectations.”