Kashkari Says Wage Growth Is Too High, Fed Can’t Declare Victory Or There Will Be “Flood Of Exuberance”

Speaking at a question-and-answer session in Sioux Falls, South Dakota, Minneapolis Fed President Neel Kashkari, who is a voter on the FOMC in 2023, said that he has not yet decided if he will back accelerating the central bank’s interest-rate increases when officials meet later this month, amid signs inflation is not cooling as hoped, and explained why the Fed will not stop until it has started a recession as follows: “if we declare victory too soon, there will be a flood of exuberance and we will need to do even more work.”

“I’m open-minded, at this point, about whether it’s 25 or 50 basis points,” Kashkari said, but noted that to him it is “much more important than whether it’s 25 or 50 is what we signal in what’s called the dot plot,” even though Powell explicitly tried to talk down the predictive power of the dot plot after the Fed’s catastrophic experience in predicting ‘Transitory inflation’ in 2021.

“We’re not yet seeing much of a sign of our interest-rate increases slowing down the services sector of the economy and that is concerning to me,” he said. “Wage growth is at a level that it actually is too high to be consistent with our” 2% inflation target.

Some other highlights from Kashkari’s speech courtesy of Bloomberg:

• *KASHKARI: DON’T WANT RECESSION BUT SLOWING INFLATION IS JOB ONE
• *KASHKARI: DON’T OVERREACT TO ONE MONTH OF DATA
• *KASHKARI: I LEAN TOWARDS CONTINUING TO HIKE RATES FURTHER
• *KASHKARI: US ECONOMY IS NOT IN A RECESSION RIGHT NOW
• *KASHKARI: DON’T KNOW IF FED CAN ACHIEVE A SOFT ECONOMIC LANDING
• *KASHKARI: SOME GROUNDS FOR OPTIMISM BUT WE MUST COOL INFLATION

Perhaps the most interesting comment was Kashkari’s admission that if the Fed declares “victory too soon, there will be a flood of exuberance” and it will need to do even more work, a reference to the Fed’s catastrophic policy error during the Burns Fed. Of course, while Volcker managed to finally contain inflation when he hiked rates to 20%, he also sparked the worst recession since the Great Depression. Will Powell be able to do the same knowing he will be crucified – metaphorically we hope – by Democrats who can’t afford a surge in unemployment ahead of the Nov 2024 elections.

In any case, minutes from the January discount rate meetings showed that directors from the Minneapolis Fed favored a 50 basis point hike in that rate. Those votes are typically a proxy for how the president would like to vote on the federal funds rate at the upcoming Federal Open Market Committee meeting.

Separately, minutes from the Jan. 31-Feb. 1 FOMC meeting showed that “a few” participants favored or could have supported a 50 basis point hike. But Kashkari, despite his bombastic, hawkish rhetoric, decided to cover his ass, and to joined his colleagues in voting for the 25 basis point increase.