The Fed May Finally Be Winning the War on Inflation. But at What Cost?
There’s a good chance that the Fed could push the economy into recession. The pain will not be shared equally.
By Michael Steinberger
Early last October, Neel Kashkari, the president of the Federal Reserve Bank of Minneapolis, spoke to several dozen graduate students at the University of Minnesota.
Federal Reserve officials tend to choose their words with exquisite care.
One misstatement or clumsy phrase, even before an audience dressed in shorts and flip-flops, can spook the financial markets.
With the Fed, the nation’s central bank, rapidly raising interest rates to combat the highest inflation that the United States had experienced in four decades, Wall Street was especially skittish.
But there was little chance of Kashkari’s committing a gaffe: He was a skilled public speaker, an ability that he honed during a failed campaign for governor in California in 2014.
He also had a politician’s knack for using easy-to-understand anecdotes to illustrate complicated ideas.
Kashkari was wearing an N95 mask as he walked into the auditorium that evening; his wife and one of his children had Covid-19, and though he tested negative earlier in the day, he wanted to be cautious around others.
The mask, which he removed when he took his seat at the front of the room, was a reminder that the pandemic was still disrupting workplaces and daily life.
Kashkari, who is 49, carried with him a bottle of Cherry Coke Zero.
He drinks soda throughout the day and seldom goes anywhere without a bottle in hand.
But the Cherry Coke Zero was also a way into the story that he wanted to share — about inflation, which began spiking in the first quarter of 2021 and was running at around 8 percent year-over-year.
Kashkari told the audience that he often stocked up on soda at a service station near his daughter’s school.
The store had recently installed Cooler Screens, digital displays that, among other things, showed which drinks were available and what they cost.
Curious, Kashkari asked about the screens.
The store’s manager told him that they were installed to make it easier to update prices; instead of doing it manually, employees could now do it with a push of a button.
Those Cooler Screens, Kashkari said, were a window into the current economy: Prices were rising quickly and unpredictably, and merchants, stretched for workers because of a very tight labor market, were having to adjust how they operated in order to keep pace, a sign that inflation was possibly becoming more deeply rooted.
“That was a punch in the gut at 8 in the morning,” Kashkari said, drawing laughter from the students.
Zooming out, Kashkari explained that the Fed had initially thought that the rise in inflation would be temporary.
And it was conceivable that inflation might have eased on its own: Covid had disrupted global supply chains and had also created excess consumer demand, and perhaps, over time, things would have come back into balance on their own.
But unchecked inflation can be ruinous, and Kashkari said that for the Fed, the question became, “How much are we willing to roll the dice?”
The central bank was now aggressively increasing interest rates to bring inflation back to around 2 percent, its long-established target.
If the Fed failed to get inflation lower, it would damage its credibility and sow doubts about its ability to guide the economy.
“We at least need to walk the walk,” Kashkari said.
The “we” underscored an essential point about the Fed.
When the Fed is in the news — and it has been in the headlines a lot lately — the focus is inevitably on the central bank’s chair.
That was the case under Alan Greenspan, Ben Bernanke and Janet Yellen, and it is also true under the Fed’s current chair, Jerome Powell.
The effort to rein in inflation is seen as a test of his leadership and a battle that will go a long way to determining his legacy.
Monetary policy, though, is made by a committee that includes the Fed’s chair, the six other members of its board of governors and the presidents of the 12 regional banks that are part of the Federal Reserve System.
Kashkari, now in his eighth year at the Minneapolis Fed, has assumed an unusually high profile for a regional Fed president, and he brings an interesting résumé to the fight against inflation.
If Kashkari’s name sounds vaguely familiar, it should: As a Treasury Department official during the 2007-9 global financial crisis, he administered the Troubled Asset Relief Program, or TARP, through which the government propped up banks and other institutions to prevent them from going under.
The $700 billion bailout was deeply controversial, and much of the ire was directed at Kashkari, who had previously worked for Goldman Sachs.
An ex-banker throwing a lifeline to bankers was a bad look, to put it gently, and Kashkari was pilloried in the press and on Capitol Hill.
As Kashkari tells it, the financial meltdown shook his faith in the self-correcting powers of capitalism and also prompted him to reflect more deeply on the inequities of the American economy.
He arrived in Minneapolis as a chastened free-marketer who thought the Fed could play a bigger role in pushing for a more just economy.
To that end, he helped put the Minneapolis Fed at the center of discussions about the economic consequences of racism and other social ills.
He also staked out a position as an ardent dove.
In Fed-speak, doves prefer looser monetary policy to maximize employment (lower interest rates stimulate growth, which leads to more hiring) while hawks favor tighter credit to keep inflation down.
When it became evident to him in late 2021 that inflationary pressures were not abating, Kashkari changed course and joined the hawks.
Several other Fed officials did likewise (“There are no doves in foxholes” is a quip I heard a few times in recent months, and apparently what passes for central-bank humor).
Kashkari embraced his newfound hawkishness with the zeal of a convert, becoming stridently hard-line in his public comments.
His about-face has surprised former admirers who were encouraged by his effort to get the Fed to embrace a broader conception of its own mandate and who worry that the central bank has raised rates too abruptly.
Kashkari insists that he hasn’t wavered in his desire to promote a fairer economy but that taming inflation must be the priority.
“The sooner we take the medicine,” he says, “the less painful it will be.”
The medicine appears to be working — inflation is moderating, and some economists think that we have seen the worst of it.
Wage growth remains strong, though, and until that changes, it is going to be very difficult if not impossible for the Fed to get inflation back to 2 percent.
The Fed insists that its target rate is inviolable; it raised interest rates again last month and indicated that more increases are likely.
There’s a good chance that the Fed could push the economy into recession.
As former Treasury secretary Lawrence H. Summers put it when we spoke recently, “It’s hard to stop a car on ice without skidding.”
If there is a recession, the pain will probably be felt most acutely by those on the margins — the very people that Kashkari was eager to help.
In a sense, Kashkari has come to embody the harsh trade-offs at the heart of the battle against inflation.
When Paul Volcker died three years ago at age 92, he was widely remembered as the savior of the American economy.
The imposingly tall, cigar-chomping Volcker was the Fed’s chairman from 1979 to 1987.
At the time of his appointment by President Jimmy Carter, the United States was reeling from years of high inflation, high unemployment and sluggish growth.
“Stagflation” was the word coined to describe this miserable triad.
Two years before Volcker was named Fed chair, Congress passed the Federal Reserve Reform Act, which decreed that the central bank had two primary tasks: keeping prices stable and promoting maximum employment — what has come to be known as the Fed’s “dual mandate.”
In the late 1970s, the Fed was failing at both.
Volcker believed that curbing inflation was the necessary prerequisite for a return to economic health.
Inflation is the rate at which prices increase over a given period of time.
When it is persistently high — and it was around 12 percent annually when Volcker took office — it erodes the purchasing power of consumers; their money is worth less and less.
Under Volcker, the Fed raised interest rates to 20 percent and tipped the economy into recession twice — once in early 1980, and again the following year (loosely defined, a recession is when the economy contracts for an extended period).
But the draconian measures worked: By 1983, inflation had plummeted to around 4 percent, unemployment was coming down and the economy was recovering.
In economic and financial circles, Volcker became a sainted figure, credited with laying the foundation for decades of low inflation, relatively stable growth and rising — if unevenly distributed — prosperity.
The pandemic roused inflation from its long slumber.
After Covid hit, millions of Americans were stuck at home, and thanks to the booming stock market and stimulus checks sent out by the government, many of them were awash in savings.
Unable to travel or dine out, people spent money on things.
At the same time, the pandemic had wreaked havoc on supply lines, and many products were no longer reaching warehouses and retail shelves or were arriving in greatly reduced quantities.
Too much money was chasing too few goods, and a result was an outbreak of high inflation.
Russia’s invasion of Ukraine last winter pushed up food and energy prices, compounding the problem, and the Fed has been scrambling to get inflation under control ever since.
(The economist Mohamed El-Erian, the president of Queens’ College, Cambridge, and a leading voice in the debate over inflation, told me that the central bank’s belated response to surging prices was “one of the biggest Fed policy mistakes ever.”)
The Fed’s main inflation-fighting tool is its ability to move interest rates.
Interest rates are the cost of borrowing money.
When the Fed lowers rates, it is trying to spur the economy; raising rates is meant to slow the economy.
The Fed implements monetary policy through one particular interest rate, the Federal Funds Rate, which is what banks charge one another for overnight lending.
Think of it as a tiller the Fed uses to help steer the economy.
When the Fed Funds Rate goes up, other borrowing costs go up.
The Fed has sharply increased the Fed Funds Rate in the last year, and as a consequence, rates for 30-year mortgages have more than doubled (which is one reason home sales have been declining).
Credit...Photo illustration by Andrew B. MyersInterest-rate decisions are made by the Federal Open Market Committee, or F.O.M.C., which meets in Washington eight times a year.
It consists of the seven members of the Fed’s board of governors, which includes the Fed’s chair, along with the presidents of the 12 regional Fed banks.
But not everyone gets a vote.
When the F.O.M.C. convenes, voting is restricted to the Fed’s governors, the president of the New York Fed and four other regional Fed presidents, who have voting privileges for one year on a rotating basis.
The F.O.M.C. has been likened to the College of Cardinals, in that it deliberates in secret and the outcomes are breathlessly awaited.
The last time the Fed tightened interest rates repeatedly was between 2015 and 2018.
During that period, it lifted the Fed Funds Rate by 2.25 percentage points.
In just the last 10 months, it has increased the Fed Funds Rate by 4.25 percentage points.
Not since the early 1980s has the central bank raised interest rates so drastically, naturally inviting comparisons to the Volcker era.
There are certainly similarities: Then as now, high inflation was a global phenomenon, and it was driven by a combination of government spending and supply shocks (the 1973-74 OPEC embargo and the Iranian revolution in 1979, each of which sent energy prices soaring).
But there are also some crucial differences.
For one thing, interest rates were much higher under Volcker.
When the central bank started raising interest rates last March, the Fed Funds Rate was effectively zero.
In addition, when Volcker became Fed chair, inflation was already embedded in the economy, a point underscored by a button that President Gerald Ford wore on his lapel that read “WIN,” which stood for “Whip Inflation Now.”
By contrast, the current outbreak is relatively recent, and the public — so far, at least — doesn’t seem to be treating it as permanent.
That’s important, because fighting inflation is in no small part a battle against the psychology of inflation; the Fed has been raising interest rates not just to dampen price pressures but also to keep inflation expectations from becoming “unanchored” — more Fed-speak, for when people come to believe that high inflation is here to stay, which can turn into a self-fulfilling dynamic.
Kashkari’s encounter with the Cooler Screens was the sort of thing that could unnerve a central banker worried about an inflationary mind-set taking root.
That happened in the 1970s, and it could happen again, but we are not there yet.
Another major difference: The U.S. economy was moribund when Volcker was appointed Fed chair, but that is emphatically not the situation today.
While inflation is high, other benchmarks suggest an economy in reasonably good shape.
As of December, unemployment was 3.7 percent, a near-record low.
Despite inflation, planes and restaurants and stores have been full.
The economy shrank in the first two quarters of 2022, which by some definitions meant that the United States was in a recession.
Yet, the economy was also adding jobs during this period.
A contracting economy is supposed to shed jobs, not gain them.
So was that a recession?
It didn’t feel like one.
In the third quarter, the economy started growing again — gross domestic product, or G.D.P., was up 3.2 percent — even though the Fed had, by that point, raised interest rates multiple times.
The pandemic has been a disorienting experience, and it has yielded a peculiar post-pandemic economy.
“This is the most confusing economy I’ve seen in my lifetime,” says the Harvard economist Jason Furman, who served as chairman of the Council of Economic Advisers under President Barack Obama.
‘The sooner we take the medicine,’ Kashkari says, ‘the less painful it will be.’
The Fed has acted with notable certitude in the face of all this murkiness.
In one of several conversations that we had in recent months, Kashkari agreed that it was difficult to make sense of the economy: “I’ve never seen the signals so mixed.”
He went on to say, however, that the inflation data was unambiguous and that the Fed, having learned from Volcker’s example, had moved with appropriate haste and firepower.
“We know how to deal with high inflation,” he said.
But it can take a while for rate hikes to filter through the economy, and no one has any idea yet if the Fed has done too much, too little or just enough.
The answer will have enormous implications not just for the economy, but perhaps also for President Joe Biden’s re-election prospects should he decide to run again.
In 2006, Henry Paulson, the chairman and chief executive of Goldman Sachs, was appointed U.S. Treasury secretary by President George W. Bush.
At the time, Kashkari was an investment banker for Goldman in San Francisco.
He joined the firm four years earlier, after earning an M.B.A. from the University of Pennsylvania’s Wharton School of Business (he also held undergraduate and master’s degrees in mechanical engineering from the University of Illinois and previously worked on the James Webb Space Telescope).
When Paulson was named Treasury secretary, Kashkari left him a phone message expressing a desire to join his team in Washington.
After first working on issues involving alternative energy, Kashkari was asked by Paulson to look at the housing market, which following a long run-up was suddenly tanking.
The housing collapse triggered a financial crisis that took down two investment banks, Bear Stearns and Lehman Brothers.
When Lehman fell, Kashkari recalls, it was a “break-the-glass moment.”
The Treasury Department, working with the Federal Reserve, came up with a $700 billion rescue package, and Kashkari was put in charge of it.
He was a controversial choice: He was just 35, which seemed insultingly young, and a Goldman alum, no less.
The press dubbed him “the $700 Billion Man” and “Ferrari Kashkari.”
It can be argued that TARP worked, or at least didn’t fail: The financial system recovered, the program ended up costing less than initially projected and, as Kashkari likes to point out, the government ended up making a profit on the bailout of the banks.
But it was wildly unpopular: While millions of Americans lost their homes and savings, the Wall Streeters who crashed the economy were rescued from their own greed and folly.
Even though he became an object of scorn, Kashkari says he understands the rage that people felt: The bailout was antithetical to the spirit of capitalism, and as he puts it,
“When you violate the core beliefs of a society, I think it leads to great anger.”
The anger was exacerbated when none of the major culprits faced any legal reckoning.
Kashkari says that TARP was necessary to save the economy but helped fuel the populist backlash that has destabilized our politics.
The 2007-9 crisis also prompted a change in how he thought about the world.
Growing up in Akron, Ohio, he was the Alex Keaton of his household: While the rest of the family was politically liberal, he was a Ronald Reagan fanboy, drawn to the rugged individualism that Reagan championed.
When Kashkari arrived in Washington years later, he was something of a free-market purist.
The financial upheaval shattered his belief in unfettered capitalism.
He now realized that “capitalism can get things, big things, really wrong” and that “it was important to have robust regulations to protect against the gravest risks.”
After leaving the Treasury Department in May 2009, Kashkari retreated to the Sierra Nevada, where he lived in a cabin, chopped down trees and helped Paulson write his memoirs.
After his sojourn in the woods, he took a job with Pimco, a bond-trading firm in Newport Beach, Calif.
But it was a restive period for Kashkari; the work didn’t enthrall him, and he was going through a divorce (he has since remarried and is the father of two young children).
He eventually decided that, despite all the criticism and ridicule he faced because of TARP, he wanted to return to public service.
In 2014, he won the Republican nomination for governor of California and faced the incumbent, Jerry Brown, in the general election.
Kashkari ran a spirited, quixotic campaign — he spent a week living as a homeless person in Fresno — but was trounced by Brown, who won with 60 percent of the vote.
The following year, he was approached by an executive search firm that was helping the Federal Reserve Bank of Minneapolis find a new president.
The Minneapolis Fed is part of a network of regional banks that make up the Federal Reserve System, which was created in 1913 and which is almost as complicated as the economy it helps manage.
The Fed’s seven governors are based in Washington and are federal employees.
All of them are nominated by the president and subject to Senate confirmation.
The regional Fed banks are quasi-public — they were established by Congress but operate as private corporations and are owned collectively by banks in the areas they serve.
Though the regional Feds all have boards that choose their presidents, every regional Fed president must be approved by the Fed’s governors.
They then serve five-year terms.
Kashkari might have seemed an unlikely candidate to lead the Minneapolis Fed.
He had no connection to the district that it represents, which includes Minnesota, Montana, the Dakotas, parts of Wisconsin and Michigan’s Upper Peninsula.
In addition, he was not an economist; Fed officials are not required to be economists, but his five most recent predecessors at the Minneapolis Fed were.
(Jerome Powell is not an economist, either, but he was a Fed governor for nearly six years before being promoted to chairman in 2018.)
Kashkari’s run for governor figured to be another strike against him.
The Fed zealously guards its independence from the elected branches and is sensitive to anything that suggests politicization.
Kashkari feared that his foray into electoral politics would be a deal-breaker.
That turned out not to be the case: The Minneapolis Fed was looking for someone with policymaking and management experience, as well as a dash of charisma, and Kashkari was hired.
He insists that he didn’t view the job as a chance for redemption, or as an opportunity to rehabilitate his image.
But in the years since the financial crisis, he had grown increasingly troubled by issues like the racial wealth gap, and he believed that the Federal Reserve was uniquely positioned to shine a spotlight on them.
It had not been overrun by partisanship and could objectively examine economic disparities in a way that Congress, say, could not.
And Kashkari wanted the Minneapolis Fed to be at the forefront of this effort.
For many years, the Minneapolis Fed was a lodestar of what was known colloquially as “freshwater” economics, so named because it grew out of several universities in the Great Lakes region.
In crudest terms, the freshwater camp believed that the economy could usually heal itself and that government intervention was generally unhelpful.
This extended to the Fed and monetary policy: The freshwater view was that the central bank’s main job was to control inflation, and its adherents frowned on the idea of using interest rates to try to jump-start an ailing economy or — worse still — to boost employment.
The global financial crisis, a cataclysmic market failure, was seen by many observers as a death blow for the freshwater school.
That Kashkari, of all people, ended up at the Minneapolis Fed, of all places, was an intriguing coda to the events of 2007-9.
But the “freshwater” label obscured a larger truth about the Minneapolis Fed: Ideological predilections aside, it was known to produce lots of deeply insightful research.
That was also the case at other regional banks, which highlights an important fact about the Fed, which is that in addition to its policymaking function, it is one of the world’s premier economic research institutions.
Hundreds of economists are employed throughout the Federal Reserve System, and they turn out vast amounts of expert analysis.
As Kashkari saw it, the Fed had the resources to examine economic disparities in a granular way.
He also wanted the central bank to take a somewhat broader view of its own role, which historically had “leaned to the narrow side,” as he puts it.
How the nation’s wealth is allocated is ultimately up to the voters and their elected representatives.
Still, he believed that the Fed’s research could do more to advance economic justice.
In 2017, to study issues around inequality, Kashkari established an in-house think tank at the Minneapolis Fed called the Opportunity & Inclusive Growth Institute.
It is run by Abigail Wozniak, a labor economist who joined the Minneapolis Fed from the University of Notre Dame.
Wozniak told me that she took the job because she wanted to be closer to the policymaking process and was also drawn to Kashkari’s boundary-pushing vision.
She says that Kashkari thought the Fed should be “responsive to the new realities” of American economic life.
The institute holds twice-yearly conferences and features a steady flow of research on issues at the intersection of race, gender, class, public health, education and economics.
After the 2020 murder of George Floyd, which took place in Minneapolis, Kashkari helped spearhead a series of virtual conferences, involving all 12 regional Fed bank presidents, on racism and the economy.
The discussions covered a range of subtopics, including health care, financial services, housing, entrepreneurship, education and even the dearth of Black representation in the economics profession.
While the series grew out of the outrage caused by Floyd’s killing at the hands of Minneapolis police officers, it also called attention to a serious economic problem: Racial discrimination was a huge drag on the economy.
A Citigroup study, released that same year, estimated that the United States economy could have added another $16 trillion if gaps in critical areas like wages, health care and education had been closed for Black Americans in 2000.
The emergence of what appeared to be a kinder, softer Fed drew criticism.
Kashkari has been unusually outspoken for a regional Fed president.
The heads of the regional Fed banks tend to make news only when they comment on the economy or have been accused of ethical lapses.
(The presidents of the Boston and Dallas Fed banks both stepped down in 2021 after questions were raised about investments they had made, though both have maintained that they abided by the Fed’s ethics rules.)
But Kashkari didn’t feel handcuffed by institutional reticence.
Speaking of the role of regional Fed presidents, he said, “Yes, they’re typically sleepy jobs, but opportunities are what you make of them.”
Kashkari has not been shy about using his platform as a bully pulpit.
For instance, he bluntly tells audiences in his largely rural district that immigration is the only way their small communities are likely to thrive.
But Kashkari has also pushed the limits of what Fed officials can say and do.
Following Floyd’s death, he tweeted that it was clear to him that the Minneapolis police officers had been “trained to use deadly force against Black men” and that the murder was symptomatic of “institutional racism that is actively taught and reinforced.”
At one conference on racism and the economy, which took place the week after the Jan. 6 insurrection, Kashkari, commenting on the violence in Washington, said that “if those were Black militants, armed militants, storming the U.S. Capitol, I think they’d all be dead right now. And so that is the most stark example of racism and disparities in our society.”
These were unusually provocative remarks coming from a Fed official.
In 2020, Kashkari teamed up with Alan Page, a Pro Football Hall of Famer and retired associate justice of the Minnesota Supreme Court, to propose an amendment to the state Constitution that would create a fundamental and civil right to a quality public education for every Minnesota schoolchild.
Kashkari then spoke to lawmakers on behalf of the so-called Page Amendment.
He justified his advocacy by linking it to the Fed’s goal of maximizing employment — more people with good educations would presumably make for a stronger work force.
But his involvement in what was clearly a political matter caused consternation among other Fed officials, who viewed it as inappropriate.
(The Page Amendment is opposed by the state teachers’ union, which claims it is too vague and could be used by pro-voucher groups to undermine public education, and the Legislature has declined to take it up.)
In keeping with his belief that the Fed could do more to address shortcomings in the economy, Kashkari was until recently probably the most dovish figure at the central bank.
In 2017, the Fed raised interest rates three times; he voted against all three increases, because he didn’t see inflation as an imminent threat and believed that the job market, while relatively strong, could be better.
But while Kashkari was a dissenting voice then, within a few years it seemed that the Fed as a whole was becoming more dovish.
In August 2020, it updated its approach to fulfilling its employment mandate; the Fed said its objective now was job growth that was “broad-based and inclusive,” which was taken to mean growth that helped reduce racial employment disparities.
(By all accounts, Kashkari was not the driving force behind this change — it was Fed officials in Washington, led by Jerome Powell.)
The emergence of what appeared to be a kinder, softer Fed drew criticism.
Senator Pat Toomey, a Republican from Pennsylvania, accused the central bank of “woke mission creep.”
(Toomey, who recently left the Senate, declined to be interviewed for this article.)
In a talk that he gave in October 2021, Larry Summers suggested that the Fed had failed to keep inflation in check because “we have a generation of central bankers who are defining themselves by their ‘wokeness.’
They’re defining themselves by how socially concerned they are.”
When I spoke to Summers last fall, he clarified his remarks: He thought it was fine for the Fed to consider inequality and racism in its analyses, but when he made those comments, it seemed to him that the Fed had lost “some of the rigor” that normally guided its policymaking and had perhaps also wavered in its commitment to “doing hard things when necessary.”
(He thinks, though, that the Fed has atoned for its initial blunder and is doing what is needed to bring inflation under control.)
Kashkari denies that the Fed was distracted by social issues; the central bank simply erred in thinking that high inflation would be temporary.
But he admits that the Fed was reluctant to intervene when inflation jumped in early 2021: The economy was just starting to recover from its pandemic-induced coma, and he and his colleagues wanted to see if it would return to the low-inflation, modest-growth equilibrium that prevailed before Covid.
“It seems reasonable to me that we would take a few months to study this before declaring, ‘Hey, we’re in a whole new world,’” Kashkari says.
It is obvious now that the Fed should have raised interest rates sooner.
“With the benefit of hindsight,” Kashkari says, “do I wish we would have started to tighten policy earlier?
Absolutely.”
Still, he insists that it was only in late 2021 that it became unambiguously clear to him that rising inflation was not a blip.
Once he realized this, he pivoted and decided that rate hikes were required.
Kashkari suggests that his previous dovishness has given him added credibility in making the case for the Fed’s current course of action — that if even Neel Kashkari felt that the Fed had to go on a war footing against inflation, it must be so.
“I think I can play a pretty unique role here,” he told me.
Credit...Photo illustration by Andrew B. MyersOn the same day that Kashkari met with the University of Minnesota students, he had a video call with William Spriggs, the chief economist of the A.F.L.-C.I.O.
While Kashkari was spending much of his time explaining, in interviews and speeches, why the Fed was moving with such urgency to quell inflationary pressures, he was also doing a lot of listening — to C.E.O.s, small-business owners, community activists and labor leaders.
It was a perilous moment for the economy, and he wanted to hear different viewpoints.
He knew that Spriggs, who is also on the faculty at Howard University, was dubious of the Fed’s rate hikes, and he saw their meeting as an opportunity to test his own assumptions.
“Bill’s an experienced guy who brings a perspective, and we might be missing something, and we need to benefit from that,” Kashkari said later.
For the labor movement, the current economy presents an upside: The combination of high inflation and low unemployment is spurring workers to organize and also emboldening them to be more assertive in their dealings with management.
Cornell University’s School of Industrial and Labor Relations tracks work stoppages nationwide, and it reported that there were 180 strikes during the first half of 2022, which was nearly double the number from the same period the year before.
Unions were formed last year at Amazon and Apple, as well as at Starbucks and Chipotle.
And the unionization efforts appear to enjoy strong public support: According to Gallup, 71 percent of Americans approve of labor unions, the highest level since the mid-1960s.
Before discussing monetary policy with Spriggs, Kashkari asked him how concerned A.F.L.-C.I.O. members were about inflation.
Spriggs said it broke down along racial lines; internal polling indicated that inflation was the primary economic concern of white A.F.L.-C.I.O. members but barely registered among African American members.
He attributed the difference to what he called “the Fox News effect” — whites were more apt to get their news from Fox, which was devoting a lot of airtime to inflation in the run-up to the midterm elections.
“Black people don’t watch Fox News,” Spriggs said.
Turning to the Fed, Spriggs said that higher interest rates were not going to solve what he believed was still the underlying source of inflation, supply-chain interruptions caused by the pandemic and then the war in Ukraine.
The rate-tightening was very likely, though, to send the economy into recession and cause a jump in unemployment, particularly among low-wage workers, for whom losing a job is often catastrophic.
“If you become unemployed,” Spriggs said, “then all bets are off, because you can’t afford anything.”
He added: “There is no period in which the Fed pursued a deflationary policy in which low-income people won.
The median income of Black families falls, and it takes years to come back.
Child poverty spikes.”
‘If you are living paycheck to paycheck, yes, higher inflation hurts, but no paycheck hurts a lot more,’ a former Fed economist says.
Kashkari listened intently and didn’t push back except when Spriggs said that unemployment insurance at the state level would offer scant relief to laid-off workers.
Kashkari interjected to say that the system had been overwhelmed by the enormous job losses during the first months of the pandemic but that “if we have a normal recession, it should be within the capacity of the states to handle it.”
Spriggs said that a number of states had decided that they were too generous during Covid and had reduced eligibility and cut benefits.
Likewise, there was little political will in Washington to cushion the blow for victims of a recession.
While the conversation didn’t cause Kashkari to rethink his support for what the Fed was doing, it was a bracing reminder that the battle against inflation was potentially undermining the central bank’s pursuit of more equitable job growth — an effort that was paying off.
After soaring to nearly 17 percent during the first months of the pandemic, joblessness among African Americans has fallen to under 6 percent, a near-record low.
African Americans have experienced their strongest wage growth ever.
But these gains may be in jeopardy because of the Fed’s interest-rate increases.
Normally, unemployment among African Americans is almost twice what it is for their white counterparts, so if the overall jobless rate rises above, say, 5 percent, the rate for African Americans could very well be back in the double digits.
Most economists think that the Fed has had no choice but to move forcefully against inflation.
“The biggest sin any central bank can commit is to allow inflation to become entrenched,” says Diane Swonk, the chief economist at KPMG US.
And Kashkari himself sees no contradiction between his present hawkishness and his desire for a more equitable economy.
He claims that bringing inflation down will benefit all Americans, but especially low-wage workers, who have a much harder time coping with spiraling prices.
Higher interest rates may cause a recession and increase unemployment, but he is optimistic that once inflation is tamed, we can recover whatever ground was lost and enjoy sustained growth.
He cites the Volcker precedent: “While what Volcker did was painful in the moment,” he says, “it paid dividends for decades.”
But Kashkari also acknowledges that the cost of curbing inflation will probably fall hardest on the most vulnerable.
“I’m waiting for the crisis to come along where the rich get hurt,” he says.
Those sentiments haven’t — and won’t — mollify critics who think the Fed is showing callous disregard for the economic welfare of millions of Americans.
Claudia Sahm, a former Fed economist, believes that the central bank has raised interest rates much more aggressively than circumstances warrant.
What she finds particularly objectionable is that Fed officials, including Kashkari, claim to be acting in the interest of people on the margins.
But in her view, current Fed policy is putting lower-income Americans needlessly at risk.
While there is always debate about whether inflation or unemployment is worse, Sahm contends that joblessness is unquestionably more harmful for those at the bottom: “If you are living paycheck to paycheck, yes, higher inflation hurts,” she says, “but no paycheck hurts a lot more.”
Danny Blanchflower, an economist at Dartmouth College, was an author of a 2014 study that found that being unemployed was indeed worse for a person’s economic and emotional well-being than rising inflation.
Like Sahm, he disagrees with the Fed’s rate increases (he thinks high inflation is, in fact, temporary), and is disappointed but not surprised that Kashkari, in his judgment, capitulated to the hawks.
Blanchflower served for three years on the Bank of England’s Monetary Policy Committee and says the desire for consensus at central banks, especially in emergency situations, can make it very hard to hold dissenting views.
Still, he wishes that Kashkari had stood firm.
“His dovish message has been lost,” Blanchflower says.
“Why did he give up?”
On Dec. 14, the Fed raised interest rates for the seventh time in 2022 and indicated that further increases were probable.
In a news conference that day, Powell, the Fed chair, said he didn’t think anyone knew whether a recession was inevitable but acknowledged that the odds of achieving a so-called soft landing — in which inflation is brought under control by slowing economic growth without causing a recession — were diminishing.
He seemed to suggest that hard times were coming.
“I wish there were a completely painless way to restore price stability,” Powell said.
“There isn’t.”
It was a sobering message not just for the public but perhaps also for President Biden, whose political fortunes could hinge on what the Fed does from here.
(Powell declined to comment for this article.)
The encouraging news is that inflation is easing.
The Consumer Price Index, or C.P.I., which is the government’s main inflation gauge, rose 7.1 percent, down from a peak increase of 9.1 percent recorded in June.
Since then, the average price of gas has fallen by $1.19 per gallon.
It seems most of the arrows are now pointing in the right direction.
An exception, at least from the Fed’s perspective, is the labor market.
The Fed is worried about wage growth as a source of inflation.
With unemployment so low, companies are having to pay more to keep the workers they have and to hire new ones.
Wages are currently rising at around 5 percent year over year, and unless that slows, the Fed will struggle to get inflation back to around 2 percent — and the danger is that if it doesn’t slow, businesses will raise prices to cover their added labor costs, which could spark a dreaded phenomenon known as the wage-price spiral.
Odd as it might seem to regard wage increases as a problem, Fed officials note that inflation is eroding those gains.
It’s possible that the labor market has undergone a structural change as a result of the pandemic.
At least 1.1 million Americans have died from Covid-19, which has effectively shrunk the pool of available workers.
Long Covid has undoubtedly sidelined many Americans, and the pandemic also led a lot of people to take early retirement.
The upshot is that there are not enough workers to fill all the available jobs, a situation made worse by the prepandemic decline in legal immigration.
According to the Bureau of Labor Statistics, there are currently 1.7 job vacancies for every one job seeker.
When I spoke to Kashkari in early December, he noted that, even after all the Fed’s rate increases, the labor market was still incredibly tight.
“The No. 1 issue I hear from employers in our region is that they can’t find workers,” he said.
“There’s no evidence when I talk to them of any softening of labor demand.”
The Fed hopes that vacancies will decline as businesses resign themselves to leaving jobs unfilled and that this might be enough to cool wage growth without a sizable uptick in unemployment.
In its most recent forecast, however, released last month, the Fed projected that unemployment would rise to 4.6 percent from 3.7 percent this year, which equates to the loss of around 1.5 million jobs.
There is skepticism among economists that the central bank can bring inflation down to its target rate without a big jump in joblessness.
“Getting all the way to 2 percent could be very hard,” says Jason Furman, the economist at Harvard.
“I think it could require a large increase in unemployment if the Fed really needs the inflation rate to get back to 2 percent.”
The prospect of mass layoffs and a recession has prompted renewed discussion about whether the Fed should even be aiming for 2 percent inflation, which has been the official target since 2012 (and was the unstated goal for many years before that).
Some economists argue that 2 percent is too low because it constrains the Fed’s ability to pull the economy out of downturns, and they fear that the cost of driving inflation back to that level could be punishing.
“In the months ahead,” the New York Times Opinion columnist Paul Krugman recently wrote, “we may well face a choice between imposing a recession to get inflation back down to a largely arbitrary target, which we wouldn’t have chosen 20 years ago if we’d known then what we know now, and declaring victory with inflation fairly low but not quite that low.”
Fed officials insist that they have no intention for now of backing away from 2 percent.
At his news conference last month, Powell was unequivocal: “We’re not going to consider that under any circumstances.”
When I spoke recently with the former Fed chair Ben Bernanke, he told me that it would be a mistake for the central bank to abandon its own target while battling the highest inflation that the country has experienced in decades.
“Whatever the merits of the case for changing the inflation target in the long run, it can’t be done now because of the damage it would do to the Fed’s credibility,” Bernanke said.
“You can’t move the goal posts when you are behind in the game.”
But Olivier Blanchard, the former chief economist of the International Monetary Fund, suspects the Fed may end up deciding that 3 percent or thereabouts is close enough.
Blanchard has long believed that 2 percent is too low and that 3 percent would give the Fed more flexibility.
And for consumers, he adds, the difference between 2 percent inflation and 3 percent is negligible.
On the other hand, getting to 2 percent from 3 percent could inflict a lot of additional economic pain on the country.
Blanchard argues that if inflation falls rapidly over the next few months, some observers will feel that the battle has been won and that the Fed should stand down.
“People will say: ‘We’ve beaten inflation, you want to reduce inflation from 3 to 2, which we don’t care about, and you may have to do a recession again?
That’s crazy stuff.’”
If a recession is unavoidable, the Biden administration obviously hopes it will be brief.
The Volcker era offers some encouragement.
After the recession of 1981-82, the economy rebounded very quickly, and in 1984, President Reagan was re-elected in a 49-state landslide.
But if the current tightening cycle results in a slowdown that persists into next year, scrutiny of the Fed could intensify.
The central bank is normally pretty adept at resisting pressure from the White House — “The best thing you can do if you are in the Fed is put earmuffs on and just don’t listen,” Alan Greenspan advised in jest.
And in contrast to Donald Trump, who lashed out at Powell over the Fed’s rate increases in 2018, President Biden, arch-institutionalist, will undoubtedly refrain from criticizing the Fed publicly.
But his allies on Capitol Hill may not be so circumspect.
The Fed is an unelected body, and if it triggers a prolonged recession, it could find itself in a political maelstrom.
When I spoke to Kashkari last month, he said that while the most recent data was promising, he was not yet convinced that inflation had peaked and believed that it would be a mistake for the Fed to pause the rate increases.
His views carry more weight now, because he is a voting member of the F.O.M.C. this year; the committee’s next meeting runs Jan. 31 to Feb. 1.
I commented that the financial markets didn’t seem to believe that the Fed would stay the course.
The central bank, in its latest forecast, had projected that the Fed Funds Rate would increase to at least 5 percent and that there would be no rate cuts this year.
But the markets were pricing in cuts starting in its second half.
“I’ve spent enough time around Wall Street to know that they are culturally, institutionally, optimistic,” Kashkari replied.
I said it seemed almost as if the markets were playing chicken with the Fed.
Kashkari laughed.
“They are going to lose the game of chicken, I can tell you that,” he said.
He conceded, though, that the coming months could test the Fed’s resolve.
Thus far, Fed officials have been virtually unanimous in support of higher interest rates.
Kashkari said that this solidarity might become harder to maintain the longer the inflation battle drags on, especially if — or when — the labor market cools.
If inflation were to fall to 3 percent with unemployment increasing to 6 percent, things could get tricky.
He personally wouldn’t flinch: The Fed’s credibility was at stake, and it was obligated to get inflation down to 2 percent and “not just come up short because it is too painful to get there,” as he put it.
Kashkari couldn’t say for sure that others at the Fed would remain so unyielding, however.
“There are going to be tougher judgment calls to make.”
Michael Steinberger is a contributing writer for the magazine. His last feature was about the squash player Amanda Sobhy. Andrew B. Myers is a photographer and director known for his playful use of scale and composition, as well as building unique situations and sets in the studio.
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