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A senior Federal Reserve official urged keeping interest rates on hold for an “extended period,” saying lowering borrowing costs before inflation is contained would endanger the foundations of U.S. prosperity.
Minneapolis Fed President Neel Kashkari also told the Financial Times podcast “The Economics Show” that Americans' “innate” aversion to inflation means some people would prefer a recession to higher prices.
“The U.S. economy is doing very well, the labor market is doing well, inflation is coming down, but so many people are deeply unhappy with the state of the economy,” he said. “I think it's because of the high inflation that people have experienced.”
Kashkari's remarks were made on May 27, ahead of the start of a blackout period before the Federal Open Market Committee's policy vote on June 12. The podcast went live on Monday.
The Fed is expected to keep interest rates steady at a 23-year high of 5.25% to 5.5% as policymakers look for more evidence that headline personal consumption expenditures (PCE) inflation is on track to reach its 2% target. Headline PCE inflation was 2.7% in April.
“Right now, my guess is that we [rates] “We're likely to be here for a long time until we have more data that gives us confidence that underlying inflation is truly trending downwards,” Kashkari said.
He added that the strength of the U.S. economy gives U.S. rate setters “some space to get more evidence” before concluding whether the sharp decline in inflation in the second half of 2023 has completely stopped.
The Minneapolis Fed president will not have a vote on the FOMC this year, but all committee members weigh in during deliberations, and he is seen as one of the committee's most hawkish members, due in part to his comments as a former senior Treasury official.
But following a series of weak inflation readings earlier this year, many U.S. rate setters would likely prefer to keep rates higher for longer and risk slower growth, rather than risk a resurgence in price pressures undermining their credibility.
“Stabilizing inflation expectations has been the bedrock of the economic prosperity that the United States has enjoyed over the last 40 years,” Kashkari said. “I would be very cautious about putting that at risk.”
High borrowing costs and the persistent inflation they cause are a worry for U.S. President Joe Biden as he campaigns for a second term in the White House.
Recommendation
The United States has low unemployment and its post-pandemic economic growth has been faster than any other G7 country, but the consumer price index has risen by more than 19% since Biden took office.
Kashkari said his experience talking to small businesses, labor unions and workers has shown him that Americans “instinctively abhor high inflation.”
“[A labour leader] She said her members are used to dealing with recessions and relying on friends and family to get through them. [she said] “High inflation affects everyone. Everyone in my network is going through the same thing as me, so I have no one to turn to for help,” he said.
You can hear this conversation on FT's new podcast, The Economics Show with Soumaya Keynes, which gives listeners a deeper understanding of some of the most complex global economic issues in easy-to-understand weekly episodes. You can listen to Soumaya's show wherever you choose, including on Apple, Spotify and Pocket Casts.