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Fed official says interest rates should remain unchanged for “prolonged” time
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A senior Federal Reserve official has called for holding interest rates for an “extended” period, saying reducing borrowing costs before inflation is under control would put the foundations of US prosperity at risk.
Neel Kashkari, president of the Minneapolis Fed, also told the FT podcast The Economy Show that Americans’ “visceral” hatred of inflation meant that some people would prefer a recession to a jump in prices.
“The economy in the US is quite strong, the job market is strong, inflation is falling and many, many people are deeply unhappy with the state of the economy,” he said. “I think it’s because of the high inflation they experienced.”
Kashkari’s comments were made on May 27, before the start of the blackout period for the Federal Open Market Committee’s political vote on June 12. The podcast aired on Monday.
O Fed is expected to keep rates unchanged at the highest range in 23 years, between 5.25 and 5.5 percent, with rate-setters saying they want more evidence that overall expenditure inflation of personal consumption is on track to reach its 2 percent target. April’s headline PCE was 2.7%.
“Right now, my best guess is that we would [rates] here for a long period of time until we get a lot more data to convince us, one way or another, that underlying inflation is actually falling,” Kashkari said.
He added that the strength of the US economy gave those responsible for setting US interest rates “the luxury of time to obtain further evidence” before concluding whether or not the sharp decline in inflation during the second half of 2023 had completely stagnant.
Although the Minneapolis Fed president will not hold a vote on the FOMC this year, the views of all committee members are considered during deliberations. The former Treasury official’s comments marked him as one of the most aggressive members of the committee.
However, after a series of bad inflation readings Earlier this year, most U.S. rate setters would prefer to keep interest rates higher for even longer and risk lower growth, rather than see their credibility undermined by a revival of pressures on the prices.
“Anchoring inflation expectations has been the basis of much of the economic prosperity that America has enjoyed over the next 40 years,” Kashkari said. “I would be very cautious about putting that at risk.”
High borrowing costs — and the persistent inflation responsible for them – is causing consternation to US President Joe Biden as he campaigns for a second term in the White House.
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While unemployment is low and post-pandemic growth has been faster in the US than elsewhere in the G7, the consumer price index has risen more than 19% since Biden took office.
Kashkari said his experience talking to small businesses, labor groups and workers has taught him that the American people “really viscerally hate high inflation.”
“[A labour leader] said its members are used to dealing with recessions and that the way they get through a recession is by relying on friends and family. . . But [she said] high inflation affects everyone – there is no one I can rely on for help because everyone in my network is going through the same thing as me,” he said.
You can listen to this conversation at The Economics Show with Soumaya Keynes, a new podcast from the FT that brings listeners a deeper understanding of the most complex global economic issues in easy-to-digest weekly episodes. Subscribe to Soumaya’s show on Apple, Spotify, Pocket Casts or wherever you listen.