Fed's Neel Kashkari sees 40% chance of 'meaningfully higher' interest rates

cnbc.com:

Minneapolis Federal Reserve President Neel Kashkari thinks there's nearly a 50-50 chance that interest rates will need to move significantly higher to bring down inflation.

In an essay the central bank official posted Tuesday, he said there's a strong case to be made that the U.S. economy is headed towards a «high-pressure equilibrium.» Such a condition would involve continued growth featuring strong consumer spending and «the economic flywheel spinning.»

In that instance, the inflation rate falls but stays above the Fed's 2% target, posing a challenge for policymakers.

«The case supporting this scenario is that most of the disinflationary gains we have observed to date have been due to supply-side factors, such as workers reentering the labor force and supply chains resolving, rather than monetary policy restraining demand,» he wrote in a post titled, «Policy Has Tightened a Lot. Is It Enough?»

Noting that rate-sensitive areas such as housing and autos have held strong despite Fed tightening, Kashkari remarked, «These dynamics raise the question, How tight is policy right now? If policy were truly tight, would we observe such robust activity?»

Services inflation, excluding the cost of renting shelter, has been coming down, but has otherwise remained elevated, raising longer-term concerns.

«Once supply factors have fully recovered, is policy tight enough to complete the job of bringing services inflation back to target? It might not be, in which case we would have to push the federal funds rate higher, potentially meaningfully higher,» Kashkari said. «Today I put a 40 percent probability on this scenario.»

Of course, that still means he assigns a 60% chance of the Fed sticking its «soft-landing» goal, with inflation