Even Neel Kashkari thinks it's time to raise interest rates.
Since he became president of the Federal Reserve Bank of Minneapolis in 2016, Kashkari has consistently opposed rate increases and became known for holding the most dovish views of the central bank's policymakers.
But amid some of the highest inflation in decades, Kashkari on Tuesday said he supports raising rates this year — but twice, not the three times the Fed signaled on Dec. 15.
In an essay published on the Minneapolis Fed's website and in comments at a virtual event, Kashkari explained what led him to change his view.
"The truth is [that] inflation has been higher than I expected, and it has lasted longer than I expected," he said during the event hosted by the Wisconsin Bankers Association. "So, the key question is, 'Is it still going to be transitory or not?' How long is it going to last?"
He is still convinced that higher prices will be temporary and the economy will eventually return to pre-pandemic low inflation. But there's a risk that it might not if expectations begin to diverge from the 2% goal the Fed has set for inflation, he said.
"If long-term inflation expectations go up, that could then lead to and become a self-fulfilling prophecy of high inflation in the future," he said. "That could be very costly to the economy and to families and to communities."
At the same time, if the Fed overreacts to the current environment, it could needlessly slow the recovery. So he said it's important that the Fed closely monitors the data as it makes decision in the coming months.
The consumer price index rose 6.8% in November, the fastest pace in nearly 40 years. Kashkari and other Fed analysts focus on a different measure, called core inflation, that takes out volatile energy and food prices. That rate eclipsed 4% last fall, well above the Fed's target level.
Kashkari does not have a vote on the rate-setting Open Market Committee this year — voting rotates annually among the leaders of the regional Fed banks — but he provides input each time the group meets.
In his essay, Kashkari said the current high inflation has been caused by both demand and supply issues. The demand side was fueled by government aid to businesses and families, which he noted in many cases exceeded the income that had been lost. Many consumers also shifted their spending from services to goods during the pandemic, leading to spikes in certain industries.
But he sees all that returning to normal levels because government support has subsided and people are spending down savings they built up.
"I have less confidence in how quickly supply will return to normal," he said.
He has been hearing from large businesses with global supply chains that that they don't see the bottlenecks and other related challenges improving anytime soon.
"As soon as they put out one small fire, something else flares up in another part of the global supply chain," he said at the forum. "So, when I ask them when do you expect your supply chain to get back to normal, most can only venture a guess and say not in 2022 — maybe in 2023."
Omicron and other new variants of coronavirus could further muddy the supply side of the picture, he added.
Before the pandemic, Kashkari resisted higher interest rates because he was convinced the U.S. had not yet reached maximum employment, which is one of the Fed's mandates along with keeping prices stable. He saw slack in the labor market despite the low unemployment rate and said more workers would come off the sidelines if employers raised wages.
But the situation is different now, he said. While he had often been skeptical before the pandemic of businesses who claimed they couldn't find workers — often prompting him to say they should raise wages — he's less so now.
"Businesses are always telling me there's a worker shortage, but I'm more sympathetic now," he said. "By many measures, it actually looks like the demand for workers is exceeding supply for workers. And the evidence is that wages are now climbing across the board and they're climbing the fastest for the lowest-income workers."
The recovery has been uneven, he added. While nation's economic output has fully recovered and the unemployment rate has come down, the labor force is still short about 4 million to 6 million workers. He thinks many will come back as savings get spent and as health concerns subside.
"It's just going to take longer than we appreciated," he said.