Why The Fed Might Be OK With Higher Inflation In 2018


Neel Kashkari: Minneapolis Fed President Is Fine With 2.7% Inflation

On the day of the release of the Beige Report which showed price pressures are strengthening as economic growth is steady, let’s review a comment Neel Kashkari made about inflation. Neel did a Q&A on Twitter. One of the questions asked was what level of inflation the Fed would need to see to increase rates considerably. He said that because the PCE was 1.3% for over 5 years, the Fed should be fine with inflation running at 2.7% for over 5 years. I’ve never understood the mandate to be like that. He said that’s why it’s called a target and not a ceiling. The way I thought of inflation is that the goal is for it to be near 2%. While being above 2% is fine, if it is above 2% and the Fed thinks it’s headed higher, the Fed raises rates to prevent it from getting higher. It would be interesting to see the ECB having that philosophy because its inflation rate has been even lower in the past few years.

If the Fed thinks the way Neel does about inflation, it won’t raise rates an accelerated clip if inflation picks up next year. That’s important because the market expects the Fed to raise rates about twice in 2018. If inflation picks up, some would expect the number of rate hikes to increase. However, if the Fed is fine with inflation running near 3%, then we might see the same amount of rate hikes. Neel has been someone who would like to see wage gains, meaning he thinks the Fed shouldn’t raise rates much more until there are a few quarters of accelerated wage growth. It remains to be seen what Powell’s Fed does. I trust that the market has all the facts when it comes to Powell’s opinions and the opinions of the other new FOMC members. Therefore, unless he changes his mind through guidance. The percentages should reflect reality. Currently, the top two guesses the market has are 1 hike and 2 hikes in 2018. The hike in 13 days is already locked in.

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