A top Federal Reserve official said another interest rate hike is a possibility, raising the prospect that, instead of relief, businesses and households might see higher costs of borrowing in the months ahead.
Consumers have been experiencing pain from higher rates on mortgages, auto loans, and credit cards for years now, and while most economists think rates can only go down this year, Federal Reserve Bank of Minneapolis President Neel Kashkari wouldn’t rule out the possibility of another painful hike.
Kashkari, one of the voting members of the Fed’s monetary policy committee, said that such a scenario could occur if inflation continues to prove too stubborn, although he doesn’t think that unwelcome move is too likely.
Speaking at a Milken Institute conference in Los Angeles on Tuesday, Kashkari noted that in the first quarter of this year, inflation has failed to decline while economic growth has remained strong. He said that has led him to question whether monetary policy has had as much downward pressure on demand as he would have otherwise expected.
Kashkari said the most likely scenario is “we sit here for an extended period of time,” meaning that interest rates remain at their same elevated level until it is clear whether disinflation is working. He said that if inflation does start coming down, or the labor market weakens, then that might lead to cuts.
“Or if we got convinced eventually that inflation is embedded or entrenched now at 3% and that we need to go higher, we would do that if we needed to,” Kashkari said. “That’s not my most likely scenario, but I also can’t rule it out.”
Inflation is now running at 3.5% over the past year, according to the latest consumer price index data. That is well above the Fed’s 2% target and a number that has ticked up, rather than down, in recent months.
In March, as part of the most recent summary of the Fed’s economic projections, the median central bank official was still anticipating about three rate cuts this year.
Kashkari said Tuesday that he penciled in two cuts for this year in March but might change that forecast to one — or none.
The equation on rate-cutting has shifted drastically over the past five or six months.
Late last year, investors were expecting the Fed would cut interest rates up to six times in 2024, with the first downward revision coming in March.
Now, investors see the first cut coming in September or even after the November election, according to the CME Group’s FedWatch tool, which calculates the probability using futures contract prices for rates in the short-term market targeted by the Fed.
The prospect of no rate cuts until after the election is an unwelcome one for President Joe Biden, who has been plagued by poor economic approval ratings due to high inflation and interest rates.
Asked Tuesday if politics play into the Fed’s reasoning, Kashkari said Tuesday that they do not.
“If we allow that to affect our decision-making, then in a sense, we are allowing politics to drive what we are doing,” he said. “And we’re all absolutely committed to not let that happen.”
In early February, former President Donald Trump called Fed Chairman Jerome Powell (whom he appointed) “political” and predicted he would lower interest rates ahead of the election. Trump has said he would not reappoint Powell if he is elected president.
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“It looks to me like he’s trying to lower interest rates for the sake of maybe getting people elected, I don’t know,” Trump said at the time.
Powell has also bucked the insinuation that the Fed plays politics and said decisions are made based on the totality of the data.