Minneapolis Fed President Neil Kashkari noted on Friday that markets have outdone themselves in expecting the central bank — which has raised interest rates quickly this year — to start pulling back soon.
“I am amazed at the interpretation of the markets,” Kashkari said in an interview. “The Committee is united in our determination to bring inflation down to 2 percent, and I think we will continue to do what we need to do until we are satisfied that inflation is on its way to 2 percent – and we are very far from that.”
Fed officials raised interest rates by three-quarters of a percentage point this week, the second consecutive massive rate hike and a move that lifted their policy position to a range of 2.25 to 2.5 percent. This is roughly what policy makers think of as a neutral situation, neither fueling nor slowing growth, and additional interest rate increases will begin to effectively put the brakes on the economy.
Given this fact, Federal Reserve Chairman Jerome H. Powell said policy makers will now determine a rate meeting by meeting rather than committing to a broad plan beforehand. Investors took this as a sign that the central bank is likely to slow interest rate movements sharply in the coming months as the economy slows. Indeed, bond market pricing suggests that investors believe officials may start cutting interest rates next year.
“I don’t know what the bond market is looking for in coming to that conclusion,” Kashkari said, adding that the benchmark would be “very, very high” for low rates.
Mr. Kashkari said it was too early to tell how much of a rate increase would be appropriate in September, but that a half-point rate hike at upcoming Fed meetings “seems reasonable” to him.
However, he noted that the inflation data was surprising “in a bad way” and that core inflation continuing to rise could lead him to believe a three-quarter point move is needed. (Core inflation excludes volatile fuel and food prices for an indication of underlying inflation pressures.)
Kashkari said the difficult question to answer is how high interest rates should rise to fight inflation again.
“How much do we need to do to break the cycle of inflation and get inflation on its way down again?” Mr. Kashkari said. “No one knows that.”
But he added, “We know we have a job to do, and we’re committed to doing it.”