On Wednesday, May 15th local time, Minneapolis Federal Reserve Chairman Kashkali stated that he expects Fed policymakers to maintain interest rates at high levels for "an extended period of time" until they have confidence in the potential path of inflation.
On that day, Kashkali participated in the Williston Basin Oil Conference held in Bismarck, the capital of North Dakota. Kashkali stated in the discussion that he was very surprised by the resilience of the US economy in a high interest rate environment so far.
"In my opinion, the biggest uncertainty is how much downward pressure monetary policy will bring to the economy," Kashkali said. "This is an unknown number, and we are not sure - it tells me that we may need to wait a while longer until we understand the direction of potential inflation before we can draw a conclusion."
Kashkari pointed out that before the outbreak of COVID-19, the current mortgage interest rate and the federal funds rate of 5.25% to 5.50% should have been more than enough to slow the U.S. economy. He said that the current level of monetary tightening feels like "stepping on two brakes".
But things didn't go as planned. Kashkali said, "Currently, the resilience of the economy is stronger than I expected, which may actually mean we have only stepped on the brake, not two." He said that the supply chains in most sectors of the economy have normalized, and recent data shows signs of disinflation in commodity prices, even deflation.
However, at the same time, there is still some potential demand in the economy, which is currently the focus of the Federal Reserve's attention. Many officials, including Kashkari, have stated that they are paying attention to service sector inflation, among which Kashkari is particularly concerned about housing inflation.
Housing inflation
In recent years, housing costs have played an important role in inflation, accounting for up to one-third of the Consumer Price Index (CPI) and around one-sixth of the Federal Reserve's favored inflation indicator, the Personal Consumer Expenditure Price Index (PCE).
He said, "Housing is a major driver of inflation, and considering the significant increase in mortgage interest rates, the elasticity of the real estate market is much stronger than I expected." A survey report released by the New York Fed on Monday showed that American consumers expect housing prices to rise by 5.1% in one year, higher than the 2.6% predicted a year ago.
Nick Timiraos, a renowned journalist known as the "New Federal Reserve News Agency," wrote that in order to bring the US inflation rate back to 2%, the non housing service inflation rate must be reduced from the current 3.5% to below 3%, and the housing inflation rate must be reduced from 5.8% to around 3.5%, which is not easy.
However, Kashkali stated that even with relatively loose government finances, he still believes that the Federal Reserve can achieve a 2% inflation target. From the perspective of the central bank, if the government issues a large amount of debt, the central bank needs to raise interest rates to a higher level.
"We are able to achieve the 2% inflation target, and we have indeed been doing so. If the federal government adopts a different (relatively tight) fiscal path, the central bank's interest rates can be lowered lower. However, in the short term, the Federal Reserve may need a higher interest rate environment to achieve the inflation target."
Cryptocurrency=Doudouwa
When it comes to cryptocurrencies, Kashkari said he still questions the practicality of things like Bitcoin. "Apart from being used as a speculative tool, Bitcoin has hardly shown any practical use in the real world. So I compared it to 'Beanie Babies'."
Doudouwa is a plush toy that became popular in the United States in the 1990s. This small doll, valued at around $5, once became a hot commodity, with prices rising to several thousand dollars because people believed that the prices of these dolls would continue to rise. Later, these teddy bear toys, which were once priced at several thousand dollars, were sold for three at a price of 10 dollars.
Kashkali said, "If you want to collect Doudouwa, then do it. I'm just reminding those who think this is a truly useful investment tool."