Fed’s Kashkari says central bank should raise interest rates now to avoid ‘entrenched inflation problem’

Minneapolis Federal Reserve President Neel Kashkari on Wednesday outlined why he thinks the central bank should raise interest rates to curb persistent inflation and head off the need for more substantial monetary policy action at a later date.

Kashkari was one of the three Fed policymakers who dissented from the 9-3 decision to leave interest rates unchanged at last week’s monetary policy meeting and instead voted to raise the benchmark federal funds rate by 25-basis-points. The Fed has held rates steady all year.

In an interview with CNBC’s “Squawk Box,” Kashkari noted the signs of strength across various components of the economy and said he doesn’t see signs that current interest rate levels are suppressing activity, which he views as allowing for a small hike.

“Corporate earnings are through the roof. They’re doing great. The consumer is hanging in there. The labor market is hanging in there,” he said. “I look at this constellation, and I say, ‘What evidence do I have that monetary policy is particularly restrictive right now?’ So, I argued now is the time to start slowly moving up as we get more data in.

FED DISSENTERS WARN INFLATION COULD BECOME ENTRENCHED WITHOUT MONETARY POLICY TIGHTENING NOW

“I’m not calling for a dramatic increase in interest rates,” Kashkari explained. “I’m simply saying I don’t see evidence of monetary policy [being] marginally restrictive right now, and I think we have more work to do to get inflation back down.

“I would rather get going now in small steps than wait till later, then we have a really entrenched inflation problem, and we have to raise rates aggressively,” he added.

Kashkari also said Federal Reserve Chair Kevin Warsh, who was leading his second meeting as central bank chairman, didn’t pressure him over his vote and told him, “‘Do what you think is the right thing to do for the economy,'” which the Minneapolis Fed president appreciated.

FED POLICYMAKERS LEAVE RATES UNCHANGED AMID ELEVATED UNCERTAINTY

Kashkari and the two other dissenters — Dallas Fed President Lorie Logan and Cleveland Fed President Beth Hammack — each outlined their rationale for voting in favor of higher interest rates in statements released Friday.

All cited concerns about inflation persisting well above the central bank’s 2% target and the challenges policymakers would face if it becomes entrenched and cost pressures impact larger portions of the economy over time.

Both of the closely watched inflation metrics showed the pace of price growth sitting above 3% in June, with the consumer price index (CPI) at 3.5% from a year ago and the personal consumption expenditures (PCE) index at 3.7%.

FED’S FAVORED INFLATION GAUGE SHOWED PRICES PULLED BACK IN JUNE

Fresh data from July will be released later this month, with CPI data slated for release next week and PCE data at the end of the month, which will help inform how policymakers approach their next decision point.

The next meeting of the Federal Open Market Committee (FOMC), the Fed panel responsible for monetary policy moves, is scheduled for Sept. 15-16.

The market narrowly sees a rate hike as the most likely outcome, with the CME FedWatch tool reflecting a 54.9% chance of a 25-basis-point hike and a 45.1% probability of rates remaining at their current target range of 3.5% to 3.75%.