On Monday’s broadcast of CNBC’s “Squawk Box,” Minneapolis Fed President Neel Kashkari stated that “we keep getting surprised about how high inflation has been, how entrenched it has been, how slow it is coming down,” “services inflation seems pretty darn entrenched” thusfar, and that we’re not seeing evidence that stress on the banking system is helping reduce inflation. Kashkari also said that as long as inflation “continues to be entrenched at a very high level” there will probably be stresses on the banking system.
Co-host Steve Liesman asked, “What are you hearing from your banks in the Minneapolis area, there [are] quite a few large financial institutions there, and what are you hearing nationally? Are we past the worst of it?”
Kashkari answered, “In our region, we’re seeing very little imprint. In most conversations I have, people say what — they see it on TV, but they’re not experiencing…strains in our part of the country directly. Certainly, borrowers are not experiencing it. But my experience in 2008 has taught me, every time we thought we were through it, every time we said this is over, smooth sailing, the stressors reemerged. So, when I think about this crisis, it really is the outlook for inflation, if inflation continues to be entrenched at a very high level and the Federal Reserve has to keep rates high to try to bring inflation back down to break that dynamic, then the yield curve is going to be inverted for an extended period of time, and then these stresses in the banking sector will likely continue and maybe get worse. If, on the other hand, markets are right that inflation’s going to fall quickly, then you could imagine policy normalizing, the yield curve uninverting, and then these stresses in the banking sector become smaller.”
He added, “Well, we have to keep going and fighting inflation. The question is, at what rate do we have to continue to potentially raise the federal funds rate? We’ve obviously raised it a lot, five percentage points in the last year, and we are still trying to get data on what are the stressors in the banking sector — others have talked about this a lot, when the banking system comes under stress, that itself can be a damper on inflation. We’re not yet seeing the evidence that the stressors in the banking sector are doing our work for us to bring inflation down. But that doesn’t mean that channel isn’t there. So, that’s something where I’m open to saying, let’s see if we can get more evidence, are these banking stressors having some imprint on inflation? If they’re not, then the job is solely up to the Federal Reserve to continue doing our part to bring inflation down if the banking stresses are going to bring inflation down, then we should take that on. And so, I don’t know yet.”
Kashkari further stated that “even though we keep getting surprised about how high inflation has been, how entrenched it has been, how slow it is coming down, markets seem very optimistic that rates are going to fall. Now, I think that they believe that inflation is going to fall, and then we’re going to be able to respond to that. I hope they’re right, but nobody should be confused about our commitment to getting inflation back down to 2%.”
He also said, “So far, services inflation seems pretty darn entrenched. I mentioned to you before we came on camera, my flight to New York, not an empty seat, and is there any evidence that the services side of the economy is slowing? I haven’t seen it yet.”
Kashkari concluded by stating that he does think inflation will decline and that the end of the coronavirus pandemic is greatly helpful to the Fed’s efforts to fight inflation.
Follow Ian Hanchett on Twitter @IanHanchett
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