Fed’s Kashkari: Recession possible, but high inflation would be worse

(Reuters) – Minneapolis Federal Reserve Bank President Neel Kashkari on Tuesday said the Fed’s interest-rate hikes and a possible pullback in lending after two bank failures last month could trigger a recession, but allowing inflation to stay high would be even worse for the labor market.

“It could be that our monetary policy actions and the tightening of credit conditions because of this banking stress leads to an economic downturn. That might even lead to a recession,” Kashkari said in a town hall at Montana State University, in answer to a student question about job prospects.

But, Kashkari said, “We need to get inflation down. … If we were to fail to do that, then your job prospects would be really hard.”

Yields on long-term bonds are lower than those on shorter-term bonds, known as the “yield-curve inversion” and which is often a harbinger of a recession.

Kashkari said he reads the pricing in bond markets as reflecting an expectation that inflation will fall quickly, allowing the Fed to cut rates. But Kashkari said he is not that optimistic, and believes inflation, now at 5% by the Fed’s preferred measure, will get to “the mid threes” by the end of this year, still far above the Fed’s 2% target.

Most Fed policymakers see inflation falling to somewhere in the 3%-3.8% range by year-end, projections show, with the median projection at 3.3%.

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