By Leika Kihara
TOKYO, May 27 (Reuters) – The Federal Reserve must focus on containing inflationary risks that appear to be building, though it was “far too soon” to predict when it could next change interest rates even as markets price in an October increase, Minneapolis Fed President Neel Kashkari said on Wednesday.
Kashkari also said the “inflationary shockwave” sent across the globe from the Middle East war could persist, a concern that was working its way into the bond market.
“We’ve had high inflation all around the world for five years now, with the conflict in Iran pushing up energy and related prices. It’s affecting virtually every economy around the world,” he said.
“I think that can explain a lot of the concern about inflation, which then obviously works its way into the bond market,” he told Reuters in an interview in Tokyo.
When considering the fallout from the Middle East war on the U.S. economy, the risk to inflation appeared to be higher than the risk of a worsening labour market, Kashkari said, though he added the Fed must “pay attention to both”.
While the U.S. labour market was in a “decent place,” inflation was a real problem people were facing daily, with rising energy prices seen spilling over into other parts of the economy with a lag, he said.
“The other really important factor is just that we’ve had elevated inflation for five years. That affects my willingness to look through what otherwise should be a temporary supply shock,” Kashkari said.
Not responding to such persistent price pressures risked fuelling public perceptions that the Fed was not serious about getting inflation back to its target, he added.
TOO SOON TO PREDICT RATE MOVE TIMING
Kashkari voted for the Fed’s decision to hold rates steady in April, but he was among the dissenters against maintaining dovish guidance signalling that its next move could be a rate cut.
The Fed should have a neutral guidance signalling rates could either go up or down depending on upcoming data, he said. “Since the dissent, which is now several weeks ago, I think most of the data has said the inflationary risks are higher, not lower.”
Even if a quick deal could be struck between the U.S. and Iran, the imprint on inflation will likely last for a while as it would take months for supply chains to normalise, he said. Further, inflationary pressures would likely persist globally as countries seek to replenish oil reserves and keep upward pressure on prices.
When asked whether he still favoured language signalling a neutral rather than a hawkish tone, he said: “I think for now, yes. We need to see just what happens (with the Iran war). Negotiations are taking place and headlines are coming out every day. We have to see where those ultimately go.”
With the energy shock adding to inflationary pressures, markets are pricing in the chance of a Fed rate hike in October.
“I think it’s far too soon for me to make such a prediction about when the next move would be,” he said, when asked about the October rate hike bets. “I want to see what happens in those negotiations and see how global supply chains are responding.”
Asked about the Fed’s decision making under new chair Kevin Warsh, Kashkari said he thought members of the Federal Open Market Committee would be looking forward to hearing his views on the economy and policy.
“Everybody, I’m confident, will vote based on their own reading of the economy and what’s appropriate, and ultimately it’s going to be the best ideas ultimately that persuade the committee.”
Concerns over huge public debt could also keep bond markets jittery, including in Japan and the U.S., he said.
Despite its huge debt, Japan may be in a safer position than some other countries because most of the debt is held by domestic investors, Kashkari said.
While its economic fundamentals are strong, the U.S. is on an “unsustainable” fiscal path over the long run that ultimately needs to be fixed by politicians, he added.
There are no clear signs yet of a debt-driven financial crisis for now, Kashkari said. “But I also know there can be sudden moves in financial markets that can be destabilising.”
Kashkari is visiting Tokyo to attend a conference on monetary policy hosted by the BOJ and its think tank.
(Reporting by Leika Kihara; Editing by John Mair)
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