Strong household finances may mean Fed must to do more -Kashkari

BY Reuters | ECONOMIC | 05/19/22 05:49 PM EDT

(Reuters) - Minneapolis Federal Reserve Bank President Neel Kashkari on Thursday suggested that because household finances are in some cases in better shape than before the pandemic, the Fed may end up needing to raise rates further to bring inflation under control.

"Are these stronger balance sheets leading people to spend more, or be more confident, to just change their behavior, their spending patterns, and is that more sustainable - in which case maybe the Fed has to be even more aggressive," Kashkari told the Urban Institute.

That could mean difficult tradeoffs for the Federal Reserve, which is already raising rates faster than it has in decades to cool inflation running at a 40-year high.

Fed policymakers expect to get the target range for short-term interest rates, now at 0.75%-1%, a full percentage point higher by July, with more though potentially smaller rate hikes to follow.

The "plausible" hope, Fed Chair Jerome Powell said this week, is that heavier borrowing costs will drag down demand for labor enough to slow wage gains that might otherwise fuel inflation, but not so much that businesses resort to mass layoffs that could trigger a recession.

Kashkari said that because so much is beyond the Fed's control - supply chains, for instance, which in their currently tangled state are pushing upward in prices in ways that are only getting worse with China's COVID-19 lockdowns and Russia's invasion of Ukraine.

"We know we have to get inflation down; we are doing everything we can to achieve a 'soft landing,' but I'll be honest with you: I don't know the odds of us pulling that off," Kashkari said.

A rout in equities including an 18% drop in the S&P 500 Index since its Jan. 3 record close may help the Fed out, by reducing spending and therefore demand.

"The wealth effect is a real thing...those who have stocks have higher 401Ks, they feel more confident, they go out and spend more, when those things come down, it may change their behavior," Kashkari said. Though the Fed does not target stock prices, "we do pay attention to that feedback."

(Reporting by Ann Saphir; Editing by Chris Reese and Chizu Nomiyama)

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