Minneapolis Federal Reserve Bank Governor Neil Kashkari suggested on Friday that markets were ahead of expectations that the central bank, which has been raising rates rapidly this year, will soon begin cutting rates.
“I was surprised by the market interpretation,” Kashkari said in an interview. “The committee is united in its determination to bring inflation down to his 2% mark and will continue to do what is necessary until he is confident that inflation is back on track to his 2% mark. I think, and we’re far from it.”
Fed officials hiked interest rates by three-quarters of a percentage point this week, making two very large rate hikes in a row, setting policy settings in the 2.25-2.5% range. This is what policymakers see as a neutral situation, where growth is neither boosted nor slowed, and further interest rate hikes will begin to aggressively put the brakes on the economy.
Given that fact, Fed Chairman Jerome H. Powell said policymakers set interest rates on a meeting-by-meeting basis rather than committing to broad plans in advance. We thought that the slowdown in volatility indicated that central banks were likely to slow interest rate movements significantly in the coming months. In fact, bond market pricing suggests investors think officials may even start cutting rates next year.
“I don’t know what the bond market is looking at to reach that conclusion,” Kashkari said, adding that the hurdles to a rate cut are “very, very high.”
Kashkari said it was too early to tell how much rate hikes would be appropriate in September, but said a 0.5 percentage point hike “seems reasonable” at future Fed meetings.
But he said the inflation data were surprising “in a bad way” and that a continued rise in core inflation could lead the Fed to think that a three-quarters point move would be needed. Inflation removes fluctuating fuel and food prices to capture signs of underlying inflationary pressures.)
The tough question to answer, Kashkari said, is how high interest rates need to be to keep inflation down.
“How much do we have to do to break the cycle of inflation and reverse inflation?” Kashkari said. “No one knows that”
“We know we have work to do, and we are committed to doing it,” he said.