Neel Kashkari At Aspen Economic Strategy Group - Comments On The Road Ahead For The Fed
Be careful . . . the road ahead may be bumpy.
This past May 15, I wrote the below post based on a then-recent note from Credit Suisse Investment Strategist Zoltan Pozsar.
Here’s just a tiny snippet of what I wrote in that article.
As Pozsar says, the message [of recent quotes from Bill Dudley, former President of the Federal Reserve Bank of New York], could not be clearer. What might this entail? Pozsar suggests that the Fed could go as far as engineering “a (covert) recession . . . in order to maintain price stability.” (Italics mine)
Not long after that, in roughly mid-June, the S&P index bottomed around the 3,636 range, and the Nasdaq at 10,565. Since that time, the market has experienced what could only be described as a ferocious bear-market rally, with the S&P sitting at 4,294 and the Nasdaq at 13,116 as I write this.
Some of this strong rally came after the July, 2022 inflation number came in at 8.5%, surprising to the downside for the first time in a while. For whatever reason, this appears to have led to the thought that we may be on our way “out of the woods,” so to speak, in the battle against inflation.
As a result, I have spent a fair amount of time over this past week reading commentary from several sources I respect, in an attempt to figure out if this is the case. Long story short, this commentary leans toward the view that, for a variety of reasons, we face a strong likelihood of a period of recession, and even stagflation, in the months and possibly years ahead.
I hope to, in future articles both here and on Seeking Alpha, write a little more about the reasons for this.
For today’s article, however, I want to simply focus on something I recently came across that directly relates to my Pozsar article of May 15.
Neel Kashkari at Aspen Economic Strategy Group’s 2022 Annual Meeting
Minneapolis Fed President Neel Kashkari recently participated in a panel discussion, “Is the U.S. Headed for Stagflation?” at the Aspen Economic Strategy Group’s 2022 annual meeting in Aspen, Colorado.
Here’s a direct link, for readers who may have the time, and interest, to listen to the entire session, which includes several other notable panelists as well.
With specific reference to the part the Fed will play in all of this, here are some of what I feel are extremely relevant comments from Kashkari.
First of all, on his response to the July, 2022 inflation number of 8.5%.
I was certainly happier to see inflation surprise to the downside . . . for the past year almost every inflation reading has surprised us to the upside, which is, you know, really problematic if you are the Federal Reserve.
But what about the question of the market’s apparently exuberant response to this development? Might the Fed quickly reverse course on future rate increases?
At roughly the 9-minute mark in the video, Kashkari offers a clear note of caution:
We are far, far, far away from declaring victory. I mean, this is just the first hint that maybe inflation is starting to move in the right direction, but it doesn’t change my path . . . [with respect to interest rates] I recommended being at 3.9% by the end of this year and 4.4% by the end of the following year. I haven’t seen anything that changes that . . . at least speaking for myself we are a long way away from saying we are anywhere close to declaring victory. We have to get back to 2%. We have a duty to get to 2%, my colleagues on the Federal Reserve and I are serious about it, we’re united in that commitment, and we’re going to do what we need to do to get inflation back to 2%.” (Italics mine)
One of the other panelists was Larry Fink, Chairman and CEO of BlackRock, the world’s largest asset manager. At this point in the discussion, he asked Kashkari “Why not 3%? What’s so magical about 2?”
Kashkari’s response:
It’s magical because, If we had picked 3 ten years ago, that would have been a reasonable thing. But our credibility is now on the line because we committed to 2, we set the expectation for 2, and if now we say “well, you know what, 3 is OK,” . . . you really can’t trust us. Because we set this commitment, we have to deliver. (Italics mine)
He want on to say that if, for example, the public along with Congress want to say that “3 is OK,” he is happy to have that debate. But that the Fed, on its own, should not simply do so and declare victory. To do so, he said, “would do long-term damage to the credibility of the institution.”
Pushed by the moderator to add just a little more color, Kashkari reminded that current projections from the Fed show inflation clearly running above their target at the very least into 2024. He then wrapped up that portion of the discussion by saying:
The idea that we are going to start cutting rates early next year, when inflation is very likely going to be well, well, well in excess of our target, I just think it’s not realistic. I think a much more likely scenario is that we will raise rates to some point and then we will sit there until we get convinced that inflation is well on its way back down to 2% before I would think about easing back on interest rates.” (Italics mine)
Later, at roughly the 25-minute mark in the video, Kashkari, answering a very direct and specific question from the moderator, reiterates that he is willing to accept a recessionary period to get back to 2%, and that this reflects the view of his colleagues as well.
Be Careful - The Road Ahead May Be Bumpy
As I conclude this article, an admission.
I was fortunate enough to pick up some shares in ETFs such as ITOT, IXUS, VEU, and VTI at points fairly close to those June lows. However, disbelieving the rally, and desiring to raise cash, I sold some along the way at points far below where we are now, leaving at least some money on the table.
Who knows? In the short run at least, this could continue. At the same time, the reading I have done this week, including what I have shared in this article, does nothing to change my belief that the market has gotten a bit ahead of itself.
And so I will conclude this short piece where I started. Be careful, the road ahead may be bumpy.