Minneapolis Fed Chairman Neel Kashkari today acknowledged that inflation has risen and lasted longer than originally estimated, according to foreign agencies.
The official said he expected the US Federal Reserve to raise interest rates twice this year to tackle inflation, abandoning its previous position that interest rates could remain at a record low until at least 2024.
The Fed’s preferred index for inflation, the price index for personal consumption expenditure, rose 5.7% year on year in November. This is the highest level since 1982 and well above the official 2% target.
Given the new reality of persistent inflation, Kashkari said the economy faces two different paths that present both risks.
One risk is that high inflation will lead consumers to expect even higher inflation. Economists believe this could create an upward spiral, which could hit the economy, Kashkari warned.
“None of my colleagues at the Federal Reserve want that to happen,” he said.
On the other hand, the COVID-19 crisis could subside, driving the economy back into a low-inflation environment, Kashkari added.
Weak inflation could lead the economy to constantly flirt with the recession, limiting the Fed’s ability to boost growth. This risk could lead the central bank to delay aggressive interest rate hikes.
“It will be a difficult task to navigate through these two very different scenarios,” Kashkari said.
“We will monitor developments over the next six months, next year, both on the supply side and on the supply side, to determine the right course for the US economy,” he said.
Kashkari pointed out that the demand-side factors that led to rising inflation are expected to disappear over time. However, he warned that companies report that disruptions in supply chains leading to price increases, amplifying inflationary pressures, are expected to continue until 2023.
Investors see a 50% chance the Fed will raise interest rates in March. This will be the first increase in interest rates from 2018. There are some estimates that the first increase in interest rates will be by 50 basis points.
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Source From: Capital
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