Yahoo Finance Minneapolis Fed’s Kashkari explains why he missed inflation, calls for higher rates
Minneapolis Federal Reserve President Neel Kashkari said Wednesday he was wrong in thinking inflation would prove "transitory" last year, and said more rate hikes will be appropriate this year to continue bringing down price pressures.
"While I believe it is too soon to definitively declare that inflation has peaked, we are seeing increasing evidence that it may have," Kashkari wrote in an essay published on Wednesday. "In my view, however, it will be appropriate to continue to raise rates at least at the next few meetings until we are confident inflation has peaked."
Inflation as measured by the consumer price index rose 7.1% over the prior year in November, down from a peak of 9.1% in June but still significantly higher than the Fed's 2% target.
In diagnosing why he got last year's inflation wrong, Kashkari argued he and others at the Fed made two key errors.
"To state clearly, I was solidly on 'Team Transitory,' so I am not throwing stones," Kashkari wrote.
"But many of us—those inside the Federal Reserve and the vast majority of outside forecasters—together made the same errors in, first, being surprised when inflation surged as much as it did and, second, assuming that inflation would fall quickly."
Kashkari wrote the Fed’s models did not capture stopped-up supply chains and surges in demand following the pandemic, noting Fed models tend to focus solely on changes in inflation expectations and gaps in the job market to explain inflation dynamics.
Comparing the rise in inflation to surge pricing seen on Uber during a rainstorm, Kashkari said the economy saw a surge in demand last year without a resulting increase in supply, which Kashkari called "surge pricing inflation."
Kashkari also said citing "shocks" to the economy like successive COVID-19 waves, war in Ukraine, and fiscal stimulus doesn't absolve the Fed's responsibility in having missed inflation.
"I think the root of our miss is that our models are not currently equipped to forecast the surge pricing inflation we are experiencing," Kashkari wrote.
Another 1% to go
The Fed's median forecast published last month calls for rates to rise to 5.1% by the end of this year.
But Kashkari cautioned the Fed may not know whether that level is high enough to bring down inflation, and suggested officials may still need to raise rates higher.
Kashkari sees the Fed raising rates a full percentage point from the current level of 4.25%-4.5% to a level of 5.4% and then hitting the pause button.
Notably, Kashkari is a voting member of the FOMC in 2023, meaning his more hawkish view on policy will register with a vote at the central bank's eight scheduled policy meetings this year.
"Once we see the full effects of the tightened policy, we can then assess whether we need to go higher or simply remain at that peak level for longer," he wrote. "To be clear, in this phase any sign of slow progress that keeps inflation elevated for longer will warrant, in my view, taking the policy rate potentially much higher."
Kashkari said he would only consider cutting rates once he’s convinced inflation is well on its way back to 2%.
"Given the experience of the 1970s, the mistake the FOMC must avoid is to cut rates prematurely and then have inflation flare back up again."
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