Fed’s Kashkari Open to Pause Rate Hikes Amid Inflation Fight

The Federal Reserve is facing a tough balancing act as it tries to rein in inflation without choking off the economic recovery. One of its top officials, Minneapolis Fed President Neel Kashkari, said he is open to holding interest rates steady at the next meeting in June to give the central bank more time to assess the effects of past rate increases and the inflation outlook.

“I’m open to the idea that we can move a little bit more slowly from here,” Kashkari told the Wall Street Journal in an interview on Friday. He said he would object to any declaration that the Fed is done lifting rates, as some market participants have speculated. “If the committee chooses to skip a meeting because we want to get more information, I could make the argument why that makes sense,” he said. “A skip to get more information is very different in my mind than [saying], ‘Hey, we think we’re done.’”

Kashkari’s comments come as the Fed has been tightening monetary policy aggressively this year in a bid to bring inflation down from the highest levels in four decades. The central bank has hiked its benchmark federal funds rate by three-quarters of a percentage point for three consecutive meetings, taking it above 3% for the first time since before the financial crisis. It has also signaled two more rate hikes of the same magnitude for November and December, according to the median of its projections.

But some economists and investors have warned that the Fed may be overreacting to transitory inflation pressures and risking a policy mistake that could derail the recovery. They point to signs of slowing growth, such as weak consumer spending and hiring, as well as rising risks from the Omicron variant of Covid-19 and supply chain disruptions.

Kashkari said he was sensitive to these concerns and to the delayed effects of the Fed’s rapid rate hikes. He also noted the potential for a credit crunch from higher bank-funding costs that resulted from the failure of three midsize lenders in March. “We need to keep tightening policy until we see some compelling evidence that core inflation is actually having peaked and is on its way down,” he said. “We need to get policy to a stance where we’re clearly tightening the economy and then we need to be patient.”

Kashkari is one of the most dovish members of the Fed’s rate-setting Federal Open Market Committee and has often dissented from its decisions in favor of looser policy. He is not a voting member this year, but will rotate into a voting seat next year.

Reference:

• Kashkari says Fed should wait for more data before raising rates again | Reuters | May 21, 2023
• Kashkari: Fed should pause rate hikes to see how economy evolves | Bloomberg | May 20, 2023
• Kashkari: Fed has room to be patient on rate hikes | CNBC | May 19, 2023