Minneapolis Fed's Kashkari says he was wrong on inflation, supports six more rate hikes this year

Long resistant to raising interest rates, Federal Reserve Bank of Minneapolis President Neel Kashkari said Friday that he's now on board with the central bank doing so six more times this year on top of Wednesday's rate increase.

That puts him in line with the projections of other Fed officials, which were released after this week's meeting of the Fed's rate setting committee. The panel on Wednesday raised the Fed's key rate by a quarter-point from zero and signaled it would rise to 1.75% to 2% by the end of the year.

"The first hike we announced this week demonstrates that we will follow through on our guidance with action," Kashkari wrote in an essay on the Minneapolis Fed's website Friday, as a quiet period for Fed officials ended.

Kashkari does not have a vote on that rate-setting committee this year, though he does participate in its deliberations. In the past, he's been one of the most outspoken policymakers at the Fed opposing rate hikes.

His stance, as well as that of other central bankers, shifted significantly in recent months as inflation remained persistently high. Last September, Kashkari projected no rate increases in 2022. By December, he forecast just two.

In the essay, Kashkari wrote that there's now a chance the Fed may have to be even more aggressive. The central bank will need to take a "contractionary" stance — with interest rates above 2% — if inflation turns out to be shaped by an entrenched shift rather than temporary factors tied to the waning pandemic and related bounceback of the economy.

Like many other central bankers, Kashkari often insisted last year that the spike in inflation the U.S. began experiencing would be transitory. In more recent months, he acknowledged it has been higher and lasted longer than he initially expected.

On Friday, he admitted he was wrong. He began his essay citing an apology President Abraham Lincoln wrote to Gen. Ulysses S. Grant in 1863 about a tactic they disagreed upon in the Civil War. Lincoln directly told Grant he was wrong and the general was right.

"While I am not Abraham Lincoln, if Lincoln could admit when he was wrong, then I should be able to as well," he wrote.

Kashkari went on to explain why he got it wrong.

On the supply side, he said businesses are struggling to find workers for longer than he expected and supply chains haven't sorted themselves out as quickly as he thought they would. He added that there are more risks of further disruptions with rising COVID-19 cases in China and amid Russia's invasion of Ukraine.

On the demand side, he said one of his biggest surprises has been that consumers are still spending so much on goods. Initially they were doing so based on the government aid they received, but now it he said it appears they're funding it out of their current income.

"That suggests to me that this robust economic activity and the associated high inflation may be sustained and in fact might not be transitory," Kashkari wrote.

Still, he said it remains to be seen whether inflation does in fact turn out to be transitory, though taking longer to sort out than he expected, or if the economy has moved to a "higher-pressure, higher-inflation equilibrium" in which people are earning more and spending more than before.

"Over the course of this year ... we will get information to help us determine how much further we may need to go" in raising rates, Kashkari wrote.