Fed Can’t Pause Rate Hikes With Core Inflation Accelerating, Kashkari Says

(Bloomberg) — The Federal Reserve can’t pause its campaign of monetary policy tightening once its benchmark interest rate reaches 4.5% to 4.75% if “underlying” inflation is still accelerating, Minneapolis Fed President Neel Kashkari said.

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“Core services inflation — which is the stickiest of all — keeps climbing, and we keep getting surprised on the upside,” Kashkari said Tuesday during a panel discussion hosted by the Women Corporate Directors Minnesota Chapter. “If we don’t see progress in underlying inflation, or core inflation, I don’t see why I would advocate stopping at 4.5, or 4.75, or something like that.”

He noted he’s previously said he could easily see the key rate reaching the “mid-4s” early next year. The target range is now 3% to 3.25%, after policymakers lifted it from nearly zero in a bid to curb the fastest inflation in four decades. Officials last month signaled they see it going to about 4.5% in 2023.

Investors currently see a peak around 4.9% early next year, according to prices of futures contracts.

Expectations for a fourth straight three-quarter point increase at the Nov. 1-2 meeting — triple the usual size — were bolstered by an Oct. 13 Labor Department report that showed US consumer prices excluding food and energy rose 6.6% in the 12 months through September. That marked a second month of acceleration in the widely tracked measure, following several months of moderation.

The Minneapolis Fed chief, who before the pandemic was known as the Fed’s most outspoken dove, has emerged this year as its biggest hawk. He emphasized that Fed officials “need to bring demand down” to fight inflation, though he also argued that inflationary pressures aren’t being driven primarily by a tight labor market.

“This inflation didn’t come from the labor market. This inflation came from supply chains and energy and commodities,” Kashkari said.

“Do we actually have a tight labor market? One way I would define a tight labor market is: Labor is in a relatively strong position, and their share of the pie is growing. Their share of the pie is shrinking. So, I don’t know.”