Fed's Kashkari says there's a 40% chance interest rates need to go 'meaningfully higher'

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UBS managing director and senior portfolio manager Jason Katz discusses the impact of the UAW strike on the Federal Reserve and the auto industry, as well as high oil prices.

Minneapolis Federal Reserve Bank President Neel Kashkari wrote in an essay published Tuesday that while he thinks it’s more likely than not the U.S. economy will achieve a «soft landing,» there’s a 40% chance that interest rates will need to rise «meaningfully higher» to finally tamp down inflation.

Kashkari wrote that it’s possible that inflation «proves more entrenched than expected,» in which case the Fed raising the benchmark federal funds rate by a quarter percentage point one more time only gets inflation down to 3% rather than its target of 2% — a scenario to which he attaches a 40% probability. The most recent data indicated that year-over-year inflation was 3.7% as of August. 

If inflation remains closer to 3%, he wrote that could indicate the U.S. economy entered a «high-pressure equilibrium» in which «households feel more confident about their economic futures and spend more than prior to the pandemic, keeping consumer demand strong and the economic flywheel spinning.»

«In this scenario, the [Federal Open Market Committee] would then have to raise rates further, potentially going significantly higher to push inflation back down to our target,» Kashkari wrote. «The case supporting this scenario is that most of the disinflationary gains we have observed to date have been due to supply-side factors, such as workers reentering the labor force and supply chains resolving, rather than monetary policy restraining demand.»

FED’S WALL OF WORRY: GOVERNMENT SHUTDOWN, UAW STRIKE, STUDENT LOAN REPAYMENTS AND $90 OIL

Minneapolis Federal Reserve Bank