Minneapolis Federal Reserve Bank President Neel Kashkari has indicated that Americans are so frustrated with inflation that they may accept a recession if it results in lower prices. In an interview on the Financial Times’ “Economics Show,” Mr. Kashkari warned consumers to prepare for the possibility of high interest rates for an extended period.
The U.S. central bank has been surprised by the longevity of inflation, which has persisted far longer than their models predicted. Mr. Kashkari called on his colleagues at the Fed to engage in serious reflection on what their current models may be missing in terms of potential sources of inflation.
While the Fed’s inflation models do allow for economic shocks to be considered, such as the supply-shock disruptions and fiscal and monetary stimulus experienced during the pandemic era, economists at the central bank who rely on these models to make predictions about price pressures still “got a lot wrong,” he said.
According to Mr. Kashkari, even if all economic shocks were predicted accurately in advance, the Fed’s inflation models would have significantly underestimated the actual level of inflation that has occurred. He urged his policymaking colleagues at the Fed to keep an open mind about the many possible ways in which inflation could reappear.
The Minneapolis Fed chief also noted that U.S. consumers are so fed up with high inflation that they appear willing to support higher interest rates to bring it down, even if it means tipping the economy into a recession. He recalled a conversation with a labor leader who represented low-income service workers, saying she told him that “inflation is worse than a recession.
Mr. Kashkari also did not rule out further rate hikes if inflation were to pick up again in the future. The latest Conference Board data on consumer confidence suggests that consumers’ perceived likelihood of a recession over the next 12 months has risen, and their assessment of their financial situation has seen a slight decline.
Inflation rates have reached 19.9 percent since January 2021, according to the latest inflation data from the government’s consumer price index report. In some categories, such as rent, grocery prices, and car repairs, the pace of inflation is even higher.