As concerns grow that the U.S. Federal Reserve (Fed) will maintain its high interest rate policy for an extended period, Neel Kashkari, president of the Minneapolis Federal Reserve Bank and considered a hawkish figure within the Fed, assessed that there is a 40% probability that the benchmark interest rate will need to be raised more than once due to inflationary pressures.
On the 26th (local time), Kashkari presented two economic outlook scenarios in a letter posted on the Minneapolis Fed website, stating this view. He judged the probability of the first scenario, a "soft landing" path, to be 60%.
This scenario involves the Fed potentially raising rates once more and then maintaining that level for a considerable period, bringing the inflation rate back to the target level of 2% within a reasonable timeframe.
Kashkari said, "The resilient economic activity we observe increasingly resembles the soft landing scenario we aim to achieve," adding, "Given the progress on inflation and labor market outcomes, I assess the probability of achieving this result at 60% at this point."
The second scenario involves inflationary pressures becoming entrenched, which Kashkari estimated at a 40% probability. He stated, "In this scenario, the Federal Open Market Committee (FOMC) would need to raise the benchmark interest rate to a significantly higher level to bring inflation back to the target."
He added, "Fortunately, to determine which scenario will prevail, we can observe the progress of inflation over the coming months."
His remarks, along with warnings from Jamie Dimon, chairman of the U.S.'s largest investment bank JP Morgan Chase, influenced the market's increased risk aversion on the day.
In an interview with the Times of India the previous day, Dimon warned that the world might not be prepared for the worst-case scenario of stagflation (economic stagnation combined with rising prices) alongside the Fed's benchmark interest rate reaching 7%.
Dimon said that raising rates from 5% to 7% would cause much greater economic pain than from 3% to 5%, stating, "Raising rates further will stress the system."
Meanwhile, Michelle Bowman, a Fed governor also considered hawkish, emphasized in a Fed event speech that as inflation outpaces wage growth, increasing tenants' cost burdens, the central bank's measures to reduce inflationary pressures are crucial.
However, Bowman did not make any direct remarks regarding monetary policy on the day.
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