Fed's Kashkari lays out case for Fed funds rate at 5.4%, sounds hawkish note

A top US central bank official laid out on Wednesday his reasoning for the need to raise interest rates by more than financial markets were currently anticipating.

The key, according to the President of the Federal Reserve Bank of Minneapolis, Neel Kashkari, lay in the fact that nominal wages were increasing at a clip of 5% or more, which was incompatible with the Fed's 2.0% target for inflation given recent trends in productivity growth.

In an essay posted to the Minneapolis Fed's website, Kashkari, also explained that the initial surge in prices was broadening out and that the Fed must control that.

Hence his projection at the time of the Federal Open Market Committee's December policy meeting that the Fed would need to take the Fed funds rate to 5.4% in 2023 before pausing.

Yet Fed funds futures were only assigning approximately 50% odds to the Fed Funds rate reaching levels nearer 5.1% over the first half of 2023 and rate cuts before the year was out.

Nevertheless Kashkari was extraordinarily cautious, going on to write that: "To be clear, in this phase any sign of slow progress that keeps inflation elevated for longer will warrant, in my view, taking the policy rate potentially much higher."

"[...] Given the experience of the 1970s, the mistake the FOMC must avoid is to cut rates prematurely and then have inflation flare back up again.

"That would be a costly error, so the move to cut rates should only be taken once we are convinced that we have truly defeated inflation."

Kashkari was a vote-wielding member of the FOMC in 2023.