HOUSTON - Federal Reserve Bank of Minneapolis president Neel Kashkari said it is likely that the US central bank will keep interest rates where they are “for an extended period of time” until officials are sure inflation is on track to their target.

In an essay published on May 7, Mr Kashkari said recent inflation data raises questions about whether monetary policy is restrictive enough to fully return price growth to 2 per cent, the rate policymakers see as the sweet spot in a healthy economy.

“The most likely scenario is that we sit here for an extended period of time,” he said later on May 7 at the Milken Institute Global Conference. “If inflation starts to tick back down, or we see some marked weakening in the labour market, then that might cause us to cut back on interest rates.”

He added: “Or if we get convinced eventually that inflation is embedded or entrenched now at 3 per cent and that we need to go higher, we would do that if we needed to.”

Mr Kashkari said that is not his most likely scenario – and the bar for raising rates is quite high – but he would not rule it out. He singled out persistent housing inflation as a potential indicator that neutral interest rates, those that neither restrict nor stimulate the economy, may be higher in the short term. That could mean the Fed has more work to do to cool inflation, he wrote in the essay.

“My colleagues and I are of course very happy that the labour market has proven resilient, but, with inflation in the most recent quarter moving sideways, it raises questions about how restrictive policy really is,” he wrote.

Fed officials have kept interest rates unchanged since their July meeting, and stronger-than-expected US inflation data has kept officials from lowering borrowing costs from the highest levels since 2001. Investors now expect just under two cuts in 2024, from as many as six seen at the start of 2024.

Mr Kashkari, who pencilled in two rate cuts for 2024 when Fed officials met in March, said on May 7 that he will forecast anywhere from zero to two cuts for 2024 when officials next meet in June, based on incoming inflation data.

Inflation as measured by the Fed’s preferred gauge rose 2.7 per cent in March. While that is down from a peak of 7.1 per cent reached in 2022, it is faster than the 2.5 per cent pace seen at the start of 2024.

Price pressures

One of the biggest drivers of inflation right now is housing. A shortage in supply is keeping prices elevated even as mortgage rates hover near their highest levels in more than 20 years.

“Given that housing is a key channel through which monetary policy affects the economy, its resilience raises questions about whether policymakers and the market are misperceiving neutral, at least in the near term,” he said.

Mr Kashkari said he raised his longer-run neutral rate forecast to 2.5 per cent from 2 per cent. Some of his colleagues on the Fed’s rate-setting Federal Open Market Committee have also raised those estimates, with the median forecast of the longer-run Fed funds rate rising to 2.6 per cent from 2.5 per cent in the latest projections published in March.

The Minneapolis Fed chief, who does not vote on monetary policy in 2024, emphasised that the central bank must set policy based on where the neutral rate is in the short run. “The uncertainty about where neutral is today creates a challenge for policymakers,” he added. BLOOMBERG