Entrenched inflation could prompt further rate hikes

Minneapolis Federal Reserve President Neel Kashkari stated during a panel discussion titled “Banking Solvency and Monetary Policy” in Boston that entrenched inflation could prompt the central bank to hike interest rates further.

Kashkari mentioned that higher interest rates could increase the pressure on banks.

Key takeaways from speech: 

“If inflation falls as markets currently expect, allowing policy rates to fall, bank balance sheet pressures would likely reduce as longer-term rates fall, causing asset prices to climb.”

“If inflation proves to be more entrenched than expected, policy rates might need to go higher, which could further reduce asset prices, increasing pressure on banks. In such a scenario, policymakers could be forced to choose between aggressively fighting inflation or supporting banking stability.”

“Anchored inflation expectations have been foundational for economic growth over the past four decades. Central banks’ fight to bring inflation back to target and preserve anchored expectations must succeed.”

“Supervisors should consider what actions could be taken now to build resilience among regional banks in case high inflation proves to be more persistent than is currently expected by market participants.”

Market reaction: 

The US Dollar is falling sharply on Wednesday following the US Consumer Price Index report that came in below expectations. The DXY is trading below 101.00, down more than 0.50% for the day, at its lowest level since mid-April.