Minneapolis Federal Reserve Bank President Neel Kashkari on Tuesday said he expects the U.S. central bank to need to raise interest rates two times this year to address persistently high inflation, reversing his long-held view that rates will need to stay at zero until at least 2024.
The surge in inflation seen over the past six months has surprised Fed officials, and they are now trying to determine how long those pressures may last, the policymaker said.
"I brought forward two rate increases into 2022 because inflation has been higher and more persistent than I had expected," Kashkari said in a post on Medium.
The Fed last month sped up reductions to its bond-buying program and signaled three rate hikes were coming in 2022. Kashkari said Tuesday he supported the faster taper as "a prudent decision that provides flexibility in the future for raising rates sooner if necessary."
The abrupt shift to embrace rate hikes by one of the Fed's most dovish policymakers underscores the level of concern at the central bank over the threat of high inflation, now running more than twice the Fed's 2% goal.
"The truth is, inflation has been higher than I expected and it has lasted longer than I had expected," Kashkari said during a virtual event hosted by the Wisconsin Bankers Association. "And so the key question is, is it still going to be transitory or not?"
Kashkari's remarks signaled he may be ready to sacrifice some gains in employment in order to keep inflation in check, a difficult tradeoff that Fed policymakers had hoped to avoid. But he also warned of the need to stay on alert for signs that once-entrenched low-inflation is returning.
"If the macroeconomic forces that kept advanced economies in a low-inflation regime are ultimately going to reassert themselves, the challenge for the FOMC will be to recognize this as soon as possible so we can avoid needlessly slowing the recovery, while at the same time protecting against the risk of entering a new, high-inflation regime," he wrote.
The Fed official said he expects the demand pressures contributing to higher inflation to weaken as the fiscal aid provided to support the economy during the pandemic fades. However, Kashkari said it is less clear how long it will take the economy to resolve supply side challenges leading to higher prices, with some companies saying they may continue into next year.
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