Fed will continue to tighten monetary policy as long as core inflation rises

According to Neel Kashkari’s announcement as Minneapolis Fed President made on Tuesday, the U.S. Federal Reserve System won’t be able to stop its campaign of monetary policy tightening at a key rate of 4.5-4.75%, if core inflation continues to gain pace.

Kashkari outlined that core services inflation as one of the most persistent continues to grow, causing the Fed’s distress. If core inflation doesn’t decrease, the Fed’s representatives won’t see it reasonable to keep the interest rate at the level of 4.5-4.75% and stop the further policy tightening.

At the moment, investors expect the peak rate around 4.9% in the beginning of the next year, guided by prices of futures contracts.

The probability of yet another interest rate raise by a three-quarter point at the Fed’s next meeting on November 2 became higher after a Labor Department report released on October 13, demonstrating an increase in U.S. consumer prices except for food and energy by 6.6% per year.

Kashkari as Minneapolis Fed President before the pandemic was known as a so-called “dove” and advocated for low interest rates, but this year he has shown himself differently and joined the side of “hawks”. He noted that in order to fight inflation, the Fed has to reduce demand. And at the same time, he accepted that inflationary pressures aren’t primarily caused by labor market impact. According to Kashkari, inflation was mostly driven by energy, commodities, and disruptions in the chain of supply.