Kashkari: Latest jobs report shows Fed needs to do more to tame inflation

The president of the Minneapolis Federal Reserve said the latest jobs report showing a much stronger than expected performance last month indicates that the Fed needs to do more to get inflation under control. 

Neel Kashkari told CNBC in an interview on Tuesday that the report, which found that the U.S. economy added 517,000 jobs in January, shows that the Fed’s actions have not yet had much of an impact on the labor market. 

He said while some evidence exists that the steps are having an effect, it’s largely been “muted” so far. Kashkari added that the Fed should continue to raise the interest rate to 5.4 percent, up from its current target rate of 5.1 percent. 

“I wish we saw more evidence that underlying inflation was trending the way we want it,” Kashkari said. “We have seen, obviously headline is down, core is down, but if you strip it all apart, the services side of the economy is still very robust, and wages are still growing at a rate that’s in excess of being consistent with that 2 percent inflation target.” 

The Fed raised interest rates by 0.25 points last week, continuing its trend of increases but hiking the rate by the lowest amount since last March. That raised the federal funds rate — the rate banks charge each other for overnight loans — to a range of 4.5 percent to 4.75 percent. 

The January jobs report released a couple days later greatly exceeded the expectation of about 185,000 jobs added last month. 

The consumer price index, a measure of inflation, has also consistently fallen in recent months, dropping from its peak of 9.1 percent in June to 6.5 percent in December. But that’s still well above the 2-percent annual inflation target the Fed wants. 

Kashkari noted that he was surprised by the major job gains. He said people should not overreact to one report, but the services part of the economy remains robust, necessitating additional action. 

He said wage growth needs to be at about 3 percent to be consistent with the 2-percent inflation target and 1 percent productivity growth. He added that wage growth has somewhat dropped, but it is still around 4 or 5 percent on a 12-month basis. 

“It’s hard to imagine that you’re going to see very strong job growth while wage growth is moderating, and that’s what I’m looking for,” Kashkari continued.

He said inflation dropping is “good news,” but 12-month total inflation should be the focus instead of shorter-term core inflation. 

“I’m not seeing that we’ve made enough progress yet to declare victory,” he said.

Kashkari also said in an interview with CNN on Tuesday that he does not expect the U.S. economy to fall into a recession, which some economic experts have worried about as a result of the Fed’s moves.

He said the job market is stronger than he expected, which makes it less likely that the economy will go into recession and that inflation will drop to 2 percent without action from the Fed.