When it comes to the Fed's resident Wall Street liaison (with prior stints at Goldman - where he laid out the framework of the Fed's original bailout - and Pimco where he did who knows what) and exemplary failer-upper, Neel Kashkari, market participants are used to broadly ignoring the Minneapolis Fed president's insights into monetary policy (not only does he not understand it, but he has been wrong about pretty much everything during his relatively brief Fed career) if only to listen to him for perspective on what will not happen. Which is why in an essay just published by the 2023 FOMC voter in Medium (where he has 3,000 followers) is informative if only for one thing: it confirms that whatever happens, the Fed will not raise rates as high as 5.4%, because that's what Kashkari thinks will happen, in the Fed's crusade to contain the worst inflation since 1980 - the same inflation the Fed's helicopter money in 2020 and 2021 made possible in the first place.
“It will be appropriate to continue to raise rates at least at the next few meetings until we are confident inflation has peaked,” Kashkari said adding that he sees the Fed "pausing at 5.4%, but wherever that end point is, we won’t immediately know if it is high enough to bring inflation back down to 2% in a reasonable period of time." And for the definitive argument why the Fed may have already hiked its last, here is Kashkari's deep insight: "Any sign of slow progress that keeps inflation elevated for longer will warrant, in my view, taking the policy rate potentially much higher."
This comes from the same forecasting genius who was kind enough to reveal that one year ago, he expected Fed Funds to be at 1% in 2023, a number which he has since raised to 5.4%. Or off by more than 80%.
But trust him this time, he will be right.
Kashkari, who is a voting member on the FOMC this year, unexpectedly emerged in 2022 as one of the Fed’s biggest hawks after spending several years before the pandemic as its biggest dove, enabling the Fed's $9 trillion balance sheet and much of the galloping inflation observed around the world today. According to Bloomberg, his 5.4% projection suggests he may be moving a bit closer to the center of the committee, given that two officials in December projected it would be appropriate to raise the federal funds rate even higher this year.
Perhaps sensing that his commentary will spark laughter across Wall Street, Kashkari said he and his colleagues missed the surge in inflation - which they created - because the central bank’s models are designed to capture inflationary pressures emanating from tight labor markets and rising inflation expectations, but aren’t well equipped to handle the type of “surge pricing inflation” brought about by the pandemic.
“This is a challenge for economists inside and outside the Fed: Can we develop frameworks and tools to analyze and potentially forecast inflation outside of labor market and expectations channels? Specifically surge pricing inflation, but potentially others as well?” he said.
“If we can deepen our analytical capabilities surrounding other sources and channels of inflation, then we might be able to incorporate whatever lessons we learn into our policy framework going forward.”
This caught the attention of the Fed's WSJ mouthpiece, Nick Timiraos, who said that Kashkari's essay offers a framework for thinking about why the Fed (and other forecasters) whiffed so badly on inflation: "He says economists need to come up with better ways to diagnose inflation caused by "surge-price" dynamics (or factors besides labor and expectations)."
Kashkari's essay offers a framework for thinking about why the Fed (and other forecasters) whiffed so badly on inflation.— Nick Timiraos (@NickTimiraos) January 4, 2023
He says economists need to come up with better ways to diagnose inflation caused by "surge-price" dynamics (or factors besides labor and expectations) pic.twitter.com/tYLhEeShJ0
To this our question is why would Kashkari be "offering a framework for thinking" about anything when he has been dead wrong about everything, although in retrospect we can't deny the utility of Kashkari's latest public comment: moments after the essay hit, terminal rates dipped as traders rushed to frontrun yet another instance of "chump" Kashkari being wrong.