Fed's Kashkari sees 40% chance of further rate hikes, perhaps 'significant' hikes

<p>The Fed's Kashkari has published an <a href="https://www.minneapolisfed.org/article/2023/policy-has-tightened-a-lot-is-it-enough-a-second-update" target="_blank" rel="nofollow">essay </a>where he says there is a 60% chance of a soft landing with a 40% chance the Fed will have to hike 'significantly higher'.</p><p>Kashkari is a dove, so him coming out with a 40% chance of rates is a problem for the markets. The S&amp;P 500 is dumping further on this, now falling 50 points or 1.1%.</p><p>He talks about a 'Soft landing' and a 'High-pressure equilibrium' as the 60/40 split but it's the 40% that is worrisome.</p><blockquote>In this scenario, the FOMC would then have to raise rates further,
potentially going significantly higher to push inflation back down to
our target. 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.
Indeed, consumer spending and economic activity both continue to exceed
our expectations. In addition, the sectors of the economy that are
typically most sensitive to interest rates, housing and automobiles,
have proven surprisingly resilient and, by some measures, have bottomed
and are now showing signs of beginning to recover. These dynamics raise
the question, How tight is policy right now? If policy were truly tight,
would we observe such robust activity?</blockquote><p>He says the 'good news' is that he doesn't need to make this determination now and will be watching data but even his soft landing scenario contemplates 'potentially one more 25 basis-point' hike. If a dove is highlighting that, why is the market only pricing in a 23% chance of a November hike?</p><p>He highlights 1994 and the moves at the long end so far as a parallel to what's happening now.</p>

This article was written by Adam Button at www.forexlive.com.