Fed Official: "May Have to Go with Interest Rate Hike if Situation Worsens"

Fed Official: "May Have to Go with Interest Rate Hike if Situation Worsens"

Minneapolis Fed President Opposed 'Easing Bias' Phrase

Minneapolis Federal Reserve (Fed) President Neel Kashkari said that as the war in Iran prolongs, the risk of rising inflation and economic damage increases, which limits the Federal Reserve's (Fed) ability to provide guidance on interest rate policy.

According to Reuters, President Kashkari appeared on the US broadcast CBS program 'Face the Nation' on the 3rd (local time) and said that he is "watching very carefully" the impact of the Iran war on inflation and economic demand.

He said that given the risks and uncertainties across all aspects of the war, the Fed might even have to raise interest rates.

He stated, "I am not comfortable signaling interest rate cuts right now. The situation could worsen, and in that case, we might have to go in the opposite direction (interest rate hikes)."

President Kashkari was one of three regional Fed presidents who, at the Federal Open Market Committee (FOMC) meeting on the 29th of last month, voted to keep interest rates steady but opposed the inclusion of the phrase 'easing bias' in the policy statement.

He issued a statement on the 1st, publicly stating his position that "the FOMC should signal a policy outlook that the next interest rate change could be a cut or a hike, depending on how the economy evolves."

While the Fed generally tends to view factors like surging energy prices as temporary, as they tend to subside over time, some officials point out that current difficulties are occurring in addition to a situation where inflation has already exceeded the Fed's target for several years.

This means the Fed might have to raise interest rates to curb inflation. However, at the same time, a surge in energy prices can weaken consumers' spending power and dampen demand, which could lead the Fed to keep interest rates stable or even cut them to protect the job market.

Earlier, Chicago Fed President Austan Goolsbee described the March Personal Consumption Expenditures (PCE) price index as "not good news" in an interview with Fox News on the 2nd.

The core PCE price index, excluding energy and food, rose 3.2% year-over-year and 0.3% month-over-month, respectively. These are the highest rates since May 2023 and November 2023, respectively.

The Fed uses the core PCE price index as a benchmark to determine whether it has achieved its monetary policy goal of '2% inflation'.