By Greg Robb
The Federal Reserve is likely to raise its policy interest rate at its next meeting in mid-March and a few more times this year, in order to “walk the walk” of previous promises to maintain a 2% inflation target, said Minneapolis Fed President Need Kashkari, on Friday.
“My expectation is that the FOMC will likely move in the March meeting” barring something unforeseen over the next six weeks, Kaskari told Yahoo Finance.
“We now need to walk the walk to say, yes, we meant what we said, we are going to achieve” the twin goals of stable inflation and maximum employment, he added.
Where the Fed goes after the first hike in March depends on the economic data, which has been “muddy,” he said.
“I’ve said that I’m comfortable raising rates a few times. But we’ve got to see how the economy evolves,” he said.
At the moment, investors are expecting five quarter-point rate hikes this year, which would bring the Fed’s policy rate up to 1.38%.
The Minneapolis Fed president is the first central banker to speak following Fed Chairman Jerome Powell’s press conference Wednesday, which was widely seen as hawkish.
Kashkari has been a leading dove at the central bank. He is not a voting member of the Fed’s interest-rate committee this year.
By mid-year, Kashkari said there could be some evidence that the high inflation readings seen through much of 2021 has started to diminish.
He added that supply-chain bottlenecks should start to work themselves out, more workers will join the labor force, and the fiscal tailwind from large COVID rescue packages over the past two years should wane.
“All of these factors should help bring inflation down, even before the Fed acts,” Kashkari said.
The yield curve, which tracks the different yields between short-and longer-run Treasury securities, will be an important guidepost for his policy outlook, Kashkari said.
The flattening of the yield curve over the past six months — as short-term yields have risen more than the yield on the 10-year Treasury note /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y -0.0036% — is a sign that the Fed won’t have to raise rates very high in order to get to a “neutral” level when the central bank’s policy rate is not spurring growth or causing a contraction, Kashkari said.
At the moment, the Fed has penciled in a 2.5% policy rate as neutral. Kashkari’s comments suggest his estimate of this “neutral rate” is lower. At the moment, the Fed’s policy rate is just above zero.
Kaskhari said he didn’t want to move Fed policy into “a net contractionary stance” by mistake.
“It’s possible that economic conditions would warrant that, but I would want to do that with my eyes open,” he said.