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Interest Rate Hike Expectations and Neel Kashkari's Take
Fed futures for the September 21st Fed Meeting now price a probability of a 1% rate hike at 24%. Yesterday, it was 0%.
A probability of a 0.75% rate hike is priced at 76%. Yesterday, it was priced at 91%.
A probability of a 0.50% hike went from 9% yesterday to 0% today.
Two weeks ago Minneapolis Fed President Neel Kashkari said he believed they'd be closer to a 0.5% to 0.75% increase at the September meeting, but it would depend on more incoming data. More data came in today and it was a slight surprise to the upside on inflation.
Kashkari at the time was not convinced we've seen peak inflation. He thinks we can get inflation down over the next few yea
rs to the 2% target.
One of the biggest mistakes the Fed made in the 70s was that they thought inflation was on its way down and that the economy was weakening... so the Fed backed off. And then inflation flared up again before they had finally squashed it. He is focused on not repeating this mistake.
Kashkari said he would be much more comfortable raising rates to around 4 or 4.5%, maybe higher, whatever is thought to be needed at the time. Then, just pause - sit there and wait to see how underlying dynamics evolve at that rate.
To him, the costliest mistake is to be fooled into thinking that inflation is finally squashed so now let’s go cut interest rates because the economy is showing signs of weakening. That could have a dramatically negative effect on the Fed’s credibility leading people to think that they will repeat the mistake of the 70s.
He wants to get somewhere with rates and sit there until inflation is licked. He thinks a 4-5% rate is where the level of restriction needs to be knowing what they know now. The most damaging risk, but not the most likely risk, is if the fed and financial markets misread underlying inflation dynamics. If they believe that inflation will come back down to 2% over the next few years and they are wrong about that, then markets and the Fed would discover that and suddenly a higher interest rate environment would be needed.
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