Kashkari says Fed should raise rates now to avoid entrenched inflation
Key Takeaways
- •Kashkari said the Fed should raise interest rates gradually rather than wait for inflation to become harder to contain.
- •He was one of three dissenters from last week’s 9-3 vote to keep rates unchanged, instead favoring a 25-basis-point increase.
- •Kashkari said corporate earnings, consumer spending, and the labor market remain strong enough that current policy does not appear highly restrictive.
- •June inflation readings remained above 3%, with CPI at 3.5% and the PCE index at 3.7%.
- •Markets currently assign a slightly higher probability to a quarter-point rate increase at the Fed’s Sept. 15-16 meeting.
Minneapolis Federal Reserve President Neel Kashkari on Wednesday said the central bank should raise interest rates to curb persistent inflation and avoid the need for a larger policy response later.
Kashkari was one of three Fed policymakers who dissented from last week’s 9-3 decision to leave interest rates unchanged and instead voted to raise the benchmark federal funds rate by 25 basis points. The Fed has held rates steady all year.
In an interview with CNBC’s "Squawk Box," Kashkari pointed to signs of strength across the economy and said he does not see evidence that current interest rate levels are suppressing activity, which he believes leaves room for a modest increase.
"Corporate earnings are through the roof. They're doing great. The consumer is hanging in there. The labor market is hanging in there," he said. "I look at this constellation, and I say, ‘What evidence do I have that monetary policy is particularly restrictive right now?’ So, I argued now is the time to start slowly moving up as we get more data in."
"I'm not calling for a dramatic increase in interest rates," Kashkari explained. "I'm simply saying I don't see evidence of monetary policy [being] marginally restrictive right now, and I think we have more work to do to get inflation back down."
"I would rather get going now in small steps than wait till later, then we have a really entrenched inflation problem, and we have to raise rates aggressively," he added.
Kashkari also said Federal Reserve Chair Kevin Warsh, who was leading his second meeting as central bank chairman, did not pressure him over his vote. According to Kashkari, Warsh told him, "'Do what you think is the right thing to do for the economy,'" a message he said he appreciated.
Kashkari and the two other dissenters — Dallas Fed President Lorie Logan and Cleveland Fed President Beth Hammack — each explained their support for higher interest rates in statements released Friday.
All three cited concerns that inflation remains well above the Federal Reserve’s 2% target and that policymakers could face greater difficulty if price pressures become entrenched and spread more broadly through the economy over time.
Both closely watched inflation measures were above 3% in June, with the consumer price index (CPI) up 3.5% from a year earlier and the personal consumption expenditures (PCE) index at 3.7%.
Fresh July data will be released later this month, with CPI due next week and PCE at the end of the month. Those reports will help inform policymakers ahead of their next decision point, as officials continue weighing whether recent inflation readings show enough progress toward the Fed’s goal.
The next meeting of the Federal Open Market Committee, the Fed panel responsible for monetary policy decisions, is scheduled for Sept. 15-16.
Markets currently view a rate hike as the slightly more likely outcome. The CME FedWatch tool shows a 54.9% chance of a 25-basis-point increase and a 45.1% probability that rates will remain in the current target range of 3.5% to 3.75%.
