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Fed’s Kashkari predicts: One rate cut this year is reasonable, but it will have to wait until December

Minneapolis Fed President Kashkari said on Sunday that it is a “reasonable forecast” that the Federal Reserve will cut interest rates once this year, but it will have to wait until December. This is lower than many economists and investors had expected.

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“We need to see more evidence to convince us that inflation is on the path back to 2%,” Kashkari said in an interview.

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We are in a very good position now to take our time and get more inflation data, more economic and job market data before we have to make any decisions,” Kashkari said. “We are in a strong position, but if you just say there will be one rate cut, as the median shows, it may be before the end of the year.”

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Kashkari is more cautious about the possibility of easing monetary policy than many of his colleagues, and he did not say how many rate cuts he personally expects.

The Federal Reserve kept its benchmark policy rate in a range of 5.25%-5.50% last week to keep continued pressure on the U.S. economy and thus curb inflation. The Fed has maintained this level since July last year. The Fed also released forecasts showing that the median forecast of all 19 Fed officials is to cut interest rates only once this year.

Kashkari said that although the Fed has significantly raised borrowing costs in 2022 and 2023, he was surprised by the performance of the U.S. job market, but he expects further cooling in the future.

He also said: “I hope the economy will cool moderately, and then we can return to a more balanced economy.”

According to the Fed’s target indicator, the year-on-year change in the personal consumption expenditure price index, the inflation rate in April was 2.7%. The Fed’s target is 2%.

The unemployment rate rose to 4% in May, the highest level since the Fed launched its interest rate hike campaign in March 2022, but it is still below the sustainable level considered by most policymakers.

Combined with the above news, Kashkari predicts that the Fed will only cut interest rates once this year, and it will not cut interest rates in the July, September and November resolutions, which is lower than many economists and investors had expected. If the Fed really acts according to Kashkari’s prediction and is not as dovish as the market imagines, it is expected to support the US dollar index and limit its future downside. Investors need to pay attention to this.

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