(Reuters) -The Federal Reserve will probably have to raise interest rates to at least 5.4% in order to tame high inflation with January job gains showing policy actions so for have done little to dent the labor market, Minneapolis Fed President Neel Kashkari said on Tuesday.
“I think it surprised all of us,” Kashkari said in an interview with broadcaster CNBC, referring to a blowout jobs report last Friday in which more than half a million employment gains were reported for January by the U.S. government. “It tells me that so far, we’re not seeing much of an imprint…on the labor market…it’s pretty muted so far, so I haven’t seen anything yet to lower my rate path.”
Kashkari, one of the most aggressive policymakers at the U.S. central bank in his assessment of how high interest rates need to go, had said a month ago that he forecast the policy rate should pause at 5.4%.
Fed Chair Jerome Powell is due to speak later on Tuesday at 1240 EST (1740 GMT), with investors anxious to hear if his assessment of the economy has changed.
Last week the Fed increased its policy rate by a quarter-of-a-percentage-point to 4.5%-4.75% but Powell reiterated expectations at that point that the Fed was eyeing a pause in the 5%-to-5.25% range as sufficiently restrictive in its fight against inflation, which is running at more than twice the Fed’s 2% goal.
January’s jobs report on Friday, however, upended investor expectations for an earlier pause after the economy added far more jobs than expected and the unemployment rate fell to 3.4%, the lowest reading since 1969.
Kashkari pointed to other concerns that emanated from such a strong labor market, including a very robust services sector and wages still growing at a rate in excess of being consistent with the Fed’s inflation target, at a time when the Fed’s steepest rate hiking cycle in 40 years is supposed to be sapping demand from the economy.
“It’s hard to imagine that you’re going to see very strong job growth while wage growth is moderating and that’s what I’m looking for…” Kashkari said. “We’ve seen no progress so far, virtually no progress in core services ex housing, and that’s very tied to the labor market.”
On Monday, Atlanta Fed President Raphael Bostic said the central bank may need to lift borrowing costs higher than previously anticipated given the unexpectedly strong job gains and noted that while a half-a-percentage-point rate hike was not his base case, it could be considered.
Kashkari also remained concerned about the possibility that loosening financial conditions could complicate the Fed’s task. “On the margin it does cause concern for me individually. I don’t think it’s a good thing that mortgage rates have come back down…it does make our jobs harder to bring the economy into balance.”
Source: Economy - investing.com
