Neel Kashkari says Federal Reserve cannot wait for supply chain to adjust
Kashkari stressed that although wages are increasing for many Americans, so are the costs of goods and services, which means workers experience a “real wage cut” because inflation is growing so quickly. He said wage-driven inflation is not happening, and the cost of goods is partially due to disruptions in the supply chain, namely caused by the pandemic and now the war in Ukraine.
“For most Americans, their wages are going up, but they’re not going up as fast as inflation, so most Americans’ real wages, real incomes are going down,” he said. “They’re getting a real wage cut because inflation is growing so quickly. I mean typically, we think about wage-driven inflation where wages grow quickly and that leads to higher prices in a self-fulfilling spiral – that is not yet happening. High prices and wages are now trying to catch up to those high prices. Those high prices are now being driven by supply chains and the war in Ukraine among other factors. And so we need to get the economy back into balance before this really does become from a very wage drive inflation story.”
Noting the recent results of the economic cost index, he stressed that it’s a good thing Americans are earning more, but the Federal Reserve cannot wait for the supply chain to adjust to get prices down.
“Just at its basic level, inflation is when demand is outstripping supply. We know supply is low because of supply chains, because of the war in Ukraine, because of COVID. We hoped that supply would come online more quickly. That hasn’t happened,” Kashkari said. “So, we have to get demand down in the balance. Now, I hope we get some help on the supply side, but that doesn’t change the fact that the Federal Reserve has its job to do, and we are committed to doing it.”
“We cannot wait till supply fully heals. We have to do our part with monetary policy,” he added.
Kashkari argued that the new bill introduced by Sens. Chuck Schumer, D-N.Y., and Joe Manchin, D-W. Va., dubbed the Inflation Reduction Act is “not going to have much of an impact on inflation” over the next several years, and it will be the Federal Reserve’s job to adjust monetary policies to get it down.
“Over the short term, the demand side effects totally swamped the supply side effects. And so, when I look at a bill that’s being considered that your two senators talked about, my guess is over the next couple of years, it’s not going to have much of an impact on inflation,” he said. “It’s not going to affect how I analyze inflation over the next few years. I think long term it may have some effect, but over the near term we have an acute mismatch between demand and supply, and it’s really up to the Federal Reserve to be able to bring that demand down.”
The White House has repeatedly held back from admitting the U.S. economy is in a recession and has been debating the definition of the term. On Sunday, Kashkari argued that inflation is so bad that it doesn’t matter if we use the term recession or not, and seriously work needs to be done to address it.
“Fundamentally, the labor market appears to be very strong while GDP, that the amount the economy is producing appears to be shrinking. So, we’re getting mixed signals out of the economy. From my perspective, in terms of getting inflation in check, whether we are technically in a recession or not doesn’t change my analysis,” he said. “I’m focused on the inflation data. I’m focused on the wage data. And so far, inflation continues to surprise us to the upside. Wages continue to grow. So far, the labor market is very, very strong. And that means whether we are technically in a recession or not doesn’t change the fact that the Federal Reserve has its own work to do.”
“We are a long way away from achieving an economy that is back at 2% inflation. And that’s where we need to get to,” Kashkari added.