Fed’s Kashkari Open to Holding Rates Steady at Next Policy Meeting in June

Minneapolis Fed President Neel Kashkari speaks during an interview at Reuters in New York on Feb. 17, 2016. (Brendan McDermid/Reuters)

Minneapolis Fed President Neel Kashkari, a member of the central bank’s rate-setting monetary policy committee, is open to pausing interest rates at the next policy meeting in June.

He told the Wall Street Journal on May 21 that members of the Federal Open Market Committee (FOMC) need more time to assess the results of previous rate increases and their impact on U.S. inflation.

Kashkari, who has become an interest rate policy hawk over the past year regarding inflation, said that inflation “does seem to be coming down,” but still remained persistently higher than the Federal Reserve had anticipated despite the interest rate hikes.

The Fed has raised interest rates sharply ten consecutive times over the past year in its strategy to combat high inflation.

The central bank raised the benchmark federal funds rate by 25 basis points earlier this month, bringing it to between 5 and 5.25 percent, the highest level since August 2007.

Critics Call for Fed to Halt Interest Rate Hikes

Although inflation has slightly moderated since last summer, it remains well above the Fed’s 2 percent target.

The Fed has been facing heavy criticism and warnings by economists not to tighten the money supply any further, which may risk driving the U.S. economy into a deep recession.

Critics like Tesla CEO Elon Musk said in an interview with CNBC last week that the Fed acted too slowly to raise interest rates and will not act in time to cut interest rates when economic conditions cool down.

“My concern with the way the Federal Reserve is making decisions is they’re just operating with too much latency,” Musk said.

“Basically, the data is somewhat stale. The Federal Reserve was slow to raise interest rates, and now I think they’re going to be slow to lower them.”

Kashkari told the Wall Street Journal regarding the Fed’s next move on interest rates, that he was “open to the idea that we can move a little bit more slowly from here.”

However, he said that Fed policymakers were still pondering the next move.

“I would object to any kind of declaration that we’re done. If the committee chooses to skip a meeting because we want to get more information, I could make the argument why that makes sense,” said Kashkari.

“A skip to get more information is very different in my mind than [saying], ‘Hey, we think we’re done,'” he said.

“It is at least not getting worse. And then you add in the uncertainties about the banking sector, are the stresses really behind us? And are there more stresses yet to emerge? I think that does give us some reason to say, ‘Hey, let’s go a little bit slower.’”

Fed officials have indicated that their decision on whether to raise rates at the next FOMC meeting on June 13–14 could come to a close vote.

Fed Policymakers Divided on Next Move

Some policymakers have said that current inflation and economic activity have not slowed enough to keep rates at present levels.

Dallas Fed President Lorie Logan said that inflation is still too high and not cooling quickly enough to justify a pause in interest rate hikes at the next policy meeting.

Others, like Fed Chairman Jerome Powell, hinted after the last meeting that they may decide to skip a rate rise, to better study the effects of the rapid rate increases.

“A decision on a pause was not made today,” said, Powell, but added, “we’re no longer saying that we ‘anticipate’” and reiterated that the Fed’s future policy decisions will “be driven by incoming data, meeting to meeting.”

Powell told the Perspectives on Monetary Policy panel at the Thomas Laubach Research Conference on May 19, that the Fed’s financial stability tools had calmed the volatility in the banking system.

He did note, however, that recent developments such as the tightening of credit standards could weigh on economic growth, hiring, and inflation.

He said that the benchmark Fed funds rate might not need “to rise as much” to achieve its inflation objectives, but agree that prices are still too high.

The Fed Chairman noted that many younger Americans are “experiencing high inflation for the first time in their lives.”

Kashkari Calls for Hawkish Policy Stance

Prior to becoming one of the strongest inflation hawks, Kashkari was one of the most dovish members of the FOMC before the pandemic and consistently favoring an easy monetary policy.

The Minnesota Fed chief said he still is considering arguments that call for another series of interest rate hike, since inflation remains higher for longer than officials have expected.

“The cost of not getting inflation down to 2 percent is much higher to Main Street than the cost of getting it down to 2 percent,” he said.

“So I would rather err on being a little bit more hawkish rather than regretting it and having been too dovish.”

Kashkari said he did not see much evidence of a credit contraction in his Fed district, which includes Montana, North Dakota, South Dakota, Minnesota, and parts of Wisconsin and Michigan.

Nonetheless, he admitted that was sensitive to the delayed impact of the Fed’s rapid rate increases and to a potential credit crunch resulting from the recent banking crisis which began in March.

According to the economist and blogger, Michael “Mish” Shedlock, the market is predicting a possible rate hike in July, with no further action by the Fed until November.

He said he anticipates an aggressive series of rate cuts starting in November and continuing into 2024.

Reuters contributed to this report.