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The Fed’s interest rate target might not be high enough to contain inflation, Federal Reserve Bank of Minneapolis President Neel Kashkara warned on Tuesday.on the Minnesota Fed’s website that the strength of the labor market and the resilience of the housing market may be indicating that interest rates need to be higher than Fed officials think.
Kashari says that the strength of certain parts of the economy, particularly housing, suggests that the neutral rate of interest—the rate that is neither holding back or pumping up the economy—may be higher than Fed officials think. As a result, current interest rates would not be as much above neutral as thought—and therefore not as restrictive.
Kashkari points out that while some areas of the economy show evidence of drag from higher interest rates, overall economic activity has show, “remarkable strength.” Economic growth has been robust nad unemployment has remained very low. The strength of the housing market, which is one of the most important channels for conveying monetary policy to the real economy, points in the other direction, Kaskkari writes. The housing market may be being supported by a combination of a shortage of houses in the aftermath of the housing bubble, a huge influx of migrants needing housing, and remote work increasing demand for houses.
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