The head of the Minneapolis fed says he thinks inflation will dip down to around 3.5 percent by the end of the year.
That comment came one day ahead of a report from the Labor Department that said inflation dropped in March.
Neel Kashkari is the head of the Minneapolis Federal Reserve district, which includes South Dakota.
During a townhall event in Bozeman, Montana, Kashkari said the bond market predicts inflation will drop fast this year. He said inflation will drop, but not as rapidly.
“The bond market is indicating that over the second half of this year inflation should fall quite quickly—so much so that the Federal Reserve would go in and start cutting interest rates. I’m not as optimistic as the bond market,” Kashkari said. “I would see us getting somewhere in the middle three’s, I hope, by the end of this year. But, on a nice, solid path back down to two percent sometime, hopefully, over the course of the following year.”
The consumer price index for March was five percent higher than March of last year. That's the smallest inflationary increase since spring of 2021.
Kashkari said policy makers like to keep inflation at around two percent, which the economy is still far from. He said the path to two percent could take some time.
“People love to say, ‘Oh, the bond market is so wise.’ They didn’t see inflation coming. They did not see the high inflation coming. Neither did we. So, we both missed it," Kashkari said. "Right now, the bond market is optimistic inflation is going to fall quickly. I’m less optimistic than they are.”
The federal reserve’s next policy meeting is in three weeks. Officials are expected to raise interest rates, again, by another quarter percentage point.
Central Bank Digital Currency
Kashkari also weighed in on the possibility of the fed establishing what's called a Central Bank Digital Currency. He said the United States is a long way, if at all, from establishing one.
The comment comes weeks after Gov. Kristi Noem issued a veto of a Uniform Commercial Code update she feared would help establish one.
A central bank digital currency would be a digital liability that’s widely available to the general public. Think cash.
Recent proposed updates to the state’s uniform commercial code would allow banks and other businesses to recognize those digital currencies that are established in other countries.
However, the updates became a political lightning rod in conservative circles where some fear it paves the way for a central bank digital currency in America.
Kashkari said, personally, he’s unsure what need a federal digital currency can meet.
“I can send anyone in this room, right now, five dollars with Venmo. Right now. It’ll show up in your account just like this," Kashkari said. "So, what could a central bank digital currency do that Venmo can’t do? I get crickets in terms of answers.”
Kashkari said a central bank digital currency is quite a ways away. Fed chair Jerome Powell said they would need congressional approval before authorizing one.
In her March veto letter to state lawmakers, Noem said the state should not create regulations for something that does not exist.
"HB 1193 opens the door to the risk that the federal government could easily adopt a Central Bank Digital Currency, which then may become the only viable digital currency,” said Noem in the letter. "More importantly, South Dakota should not open the door to a potential future overreach by the federal government.”
Other critics point to China’s digital currency, which they say allows the country to monitor transactions, directly tax customer accounts and impose negative interest rates. Kashkari said none of that is possible with a service like Venmo.
“I get why China would do it. I do not understand why the American people would be for that. I would not be for that," Kashkari said. "By the way, those three things—negative interest rates, taxing your accounts and monitoring your transactions—nobody at the federal reserve wants to do that. So, until somebody can make the argument for what this thing actually achieves that is not achievable with current technology, I don’t think there’s any case for it.”
Meanwhile, those in the blockchain industry in South Dakota are shifting their strategy to get updates to the Uniform Commercial Code passed next year. They want to abandon the portion of the bill that recognizes CBDC’s, while keeping the portion that gives legal standing to cryptocurrency.
Lawmakers will likely consider those updates again next legislative session.
