Fed’s Kashkari sees 60% chance of ‘soft landing’

The president of the Bank of the Federal Reserve of Minneapolis, Neel Kashkari, said Tuesday in an essay that he sees more likely a “soft landing” of the American economyalthough there is also a 40% chance that the entity will have to raise interest rates “in a significative way” to beat inflation.

In the most probable scenario – Kashkari put the probability around 60% -, the Fed “potentially“will raise rates another quarter of a percentage point and then keep borrowing costs stable”enough time for inflation to return to target in a reasonable period“, he indicated in an essay published on the regional entity’s website.

Inflation, according to the preferred measure of the Fedhas slowed from 7% last summer to 3.3% in July 2023, and unemployment in the United States has only risen slightly, to 3.8% in the latest reading.

According to Kashkarithis is substantial progress on inflation and a still healthy labor market, and in the most likely scenario he sees, “the tightening of monetary policy that we would soon achieve would be enough to finish the job” and offer “the proverbial soft landing we hope to achieve”.

However, in a still very possible turn of events –Kashkari places the probability at 40% -, inflation would remain around 3%, but households trust the economy enough to continue spending, maintaining upward pressure on prices already high due to supply restrictions after the pandemic.

“Once supply factors have fully recovered, is monetary policy tight enough to complete the job of returning services inflation to target?”Kashkari wondered. “It might not be, in which case we would have to raise the federal funds rate, potentially significantly”.

Last week, the Fed kept the policy rate in a range of 5.25%-5.50%, but most policymakers indicated they believe a further hike will likely be appropriate later in the year. Kashkari claimed Monday that he is part of that majority.

“The good news is that we don’t need to make this determination right now.“, he pointed. “We can look at actual progress in reducing inflation in the coming months to determine which scenario is dominant.”.