Minneapolis Fed President Neel Kashkari said Thursday he is focused on the interplay between inflation, interest-rate policy and then what strains that mix will put on the banking system.
Kashkari said that it was the inflation outlook that was keeping him up at night.
“We’ve been surprised how persistent it has been. It is coming down… but so far it’s been pretty persistent,” Kashkari said during a discussion at Northern Michigan University.
“The real question is when inflation is going to come down,” he said.
If it stays high and the Fed has to run a tight monetary policy, the result will be that short-term interest rates will be higher than longer-term rates. This creates an inverted yield curve “that creates real problems for banks of all sizes.”
Financial markets are signaling inflation is going to come down quickly, Kashkari said. If this is correct, then the pressure on banks is going to be much smaller.
But at the moment, Kashkari said “we have an inflation problem. And wage growth is growing higher than is consistent with 2% inflation.”
“It is that intersection between how embedded is inflation, therefore what does monetary policy need to do and therefore what strains that puts on the banking sector — that’s the thing that I’m trying to pay attention to,” Kashkari said.
Asked if the Fed’s 2% inflation target was permanent, Kashkari replied that now was not time to change it. However, in the future, the Fed might want to discuss changing the target. But that discussion should not come until the central banks has succeeded in hitting the target in this cycle.
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