ECONOMY

Fed’s Kashkari says ‘we are close to neutral’, while Powell assures opposite

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Federal Reserve Bank of Minneapolis President Neel Kashkari said Friday that the neutral rate, or the rate of a stable economy, is close to being achieved, though the “Fed will need to continue to assess where neutral is,” amid skyrocketing interest rates across the yield curve, he wrote in a blog post Friday.

He estimated a neutral rate of 2% and he’s “confident that the Fed will do what is needed to bring inflation down” to the central bank’s 2% average inflation target.

By contrast, Fed Chairman Jerome Powell assured that “were a very long way to neutral now,” he said at his post-monetary decision press conference on May 4. Recall the Fed hiked the target rate by 50 basis points and guided for balance sheet runoff starting in June in an effort to tame surging inflation.

Kaskkari, who is not currently a voting member of the Federal Open Market Committee, said it’s important for the Fed to “follow through on the forward guidance of federal funds rate increases and balance-sheet reduction that we have already signaled in order to validate the repricing that has taken place in financial markets.”

And while demand and supply dynamics continue to contribute to higher prices, “we will likely have to push long-term real rates to a contractionary stance to bring supply and demand into balance,” Kashkari said. He added that the war in Ukraine as well as lockdowns in China, the world’s second largest economy, “are likely delaying any supply chain improvements.”

In March, Kashkari said he “penciled in 7 rate hikes” for 2022.

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