Fed's Kashkari: "Interest Rate Hikes May Be Needed if Situation Worsens"

Neel Kashkari, President of the Federal Reserve Bank of Minneapolis, stated that the current uncertainty surrounding the Iran war is extremely high and that the possibility of raising interest rates must be considered if the situation worsens.

On May 3 (local time), appearing on CBS's "Face the Nation," President Kashkari said that the longer the Iran war drags on, the greater the risks of rising inflation and economic damage. He explained that as a result, the Federal Reserve's ability to provide guidance on interest rate policy is limited.

Neel Kashkari, President of the Federal Reserve Bank of Minneapolis. Photo by ReutersYonhap News

President Kashkari noted that, given the risks and uncertainties related to the war, the Fed may need to consider raising rates. He stated, "It is not appropriate to signal that rate cuts are possible," and added, "If the situation deteriorates further, we may have to move in the opposite direction, meaning a rate hike."

President Kashkari supported holding rates steady at the Federal Open Market Committee (FOMC) meeting held on April 29, but opposed including the phrase "easing bias" in the policy statement. At the time, Beth Hammack, President of the Federal Reserve Bank of Cleveland, and Lorie Logan, President of the Federal Reserve Bank of Dallas, also agreed to keep rates unchanged but opposed including that phrase. Fed Governor Stephen Miran expressed a dissenting opinion, supporting a rate cut. In a statement released on May 1, he said, "The FOMC should signal that the next rate move could be either a cut or a hike, depending on how the economy evolves."

The Fed typically considers factors such as sharp rises in energy prices to be temporary. However, some policymakers have pointed out that the current surge in oil prices is occurring on top of inflation already running above the Fed's target for several years. This suggests that the Fed may need to raise interest rates to contain inflation. At the same time, a spike in energy prices can weaken consumers' spending power and dampen demand. This could become a reason for the Fed to hold rates steady or even to cut them in order to protect the job market.

Austan Goolsbee, President of the Federal Reserve Bank of Chicago, said in a Fox News interview the previous day that the March Personal Consumption Expenditures (PCE) Price Index was "not good news." When determining whether it is meeting its monetary policy goal of a 2% inflation rate, the Fed uses the core PCE price index, which excludes energy and food prices, as its benchmark. The March core PCE price index rose 3.2% year-on-year and 0.3% month-on-month, marking the highest increases since May 2023 and November 2023, respectively.

Although the United States and Iran remain in a ceasefire, President Kashkari predicted that even in the best-case scenario, the turmoil would be prolonged. He said, "Last week, I spoke with the CEO of a Minnesota-based global company with supply chains around the world. Even if the Strait of Hormuz were reopened today, it is estimated that it would take about six months for supply chains to return to normal levels."

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