Kashkari Admits the Fed Does Not Know How High Rates Must Go

Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, said on October 1 that he does not know how much further interest rates have to rise to pull inflation down to the Fed's 2 percent target. Bloomberg and Axios carried the remarks. On the same day, Jeff Schmid of the Kansas City Fed said that the rise in long-term yields has already started to bite into housing and commercial lending. Two regional presidents, one morning, two statements that do not fit together cleanly. The first says the committee may not have done enough. The second says the bond market has done the work for them. Both men are voting on the price of money for 330 million Americans, and neither claims to know where that price should be.

That is the story. Not the direction of the next move, but the candor about the absence of a map.

The Admission, Stated Plainly

Strip away the institutional phrasing and Kashkari said something remarkable for a central banker. He does not know the destination. He does not know the distance. He knows only that inflation is above target and that the instrument in his hand is a short-term interest rate whose effects arrive with a lag nobody can measure in real time.

This is not a gaffe. Kashkari has been unusually willing to publish his own uncertainty. During the last hiking cycle he wrote an essay assigning roughly a 40 percent probability to a scenario in which inflation stalled above target and the Fed had to raise significantly more, against a 60 percent chance that policy was already restrictive enough. A central banker who puts probability weights on his own ignorance is being honest. He is also conceding that the committee is running a search procedure, not executing a plan.

Consider Kashkari's own record, because it matters. In 2017 he dissented three times against rate increases, arguing that inflation was too low and that the Phillips curve relationship the Fed relied on had stopped working. He wrote public essays titled to explain those dissents. Then inflation arrived in 2021 and he moved to the hawkish side of the committee. The same man, the same framework, opposite conclusions, within five years. He was wrong about the direction of risk in 2017 and he changed his mind. That is intellectual integrity at the individual level. At the institutional level it is an indictment. The tool was never calibrated. It was only ever steered by feel.

Two Presidents, Two Tightenings

Schmid's comment points at a different mechanism. He noted that the increase in long-term rates is working through housing and commercial real estate. This is the market tightening, not the committee.

The distinction is substantive. The FOMC sets an overnight rate. Mortgages price off the 10-year Treasury and the mortgage-backed securities spread. Commercial property pricing depends on the 10-year as well, plus credit spreads and the willingness of regional banks to roll a loan. When the long end rises on its own, through term premium, supply of Treasury issuance, or foreign buyers stepping back, borrowing costs climb without any FOMC vote.

The historical benchmarks are concrete. The 10-year Treasury yield crossed 5 percent in October 2023 for the first time since 2007. Freddie Mac's survey put the average 30-year fixed mortgage at 7.79 percent that same month, the highest reading in more than two decades. Existing home sales fell to roughly 4 million units annualized, a level last seen in the aftermath of the 2008 crisis. Nobody voted for that. The curve delivered it.

So the two men describe opposite policy problems. Kashkari's uncertainty implies the committee may need to add restriction. Schmid's observation implies restriction is already arriving from outside. If both are acting on their own reading, the committee risks tightening into a tightening it did not cause and cannot easily reverse. The 2022 to 2023 cycle moved the federal funds target from near zero to 5.25 to 5.50 percent, 525 basis points in sixteen months, and the committee was still arguing in late 2023 about whether that was enough. The lags are long. The instrument is blunt. The arguments do not resolve.

The Model That Keeps Breaking

The defense of discretionary monetary policy rests on a claim of expertise. Trained economists with access to the best data make better decisions than a rule. Test that claim against the record.

In August 2020, at the Jackson Hole conference, the Fed adopted a new framework called flexible average inflation targeting. The committee committed to letting inflation run above 2 percent for a period to make up for years of undershooting. The framework was announced after a decade in which the Fed had failed to hit its target from below and concluded that the risk worth guarding against was too little inflation.

Within eighteen months, headline CPI reached 9.1 percent in June 2022, the highest reading since November 1981. The framework designed to combat chronic undershooting was adopted at the precise moment the opposite problem began. Jerome Powell described the price increases as transitory through most of 2021. The Fed's own Summary of Economic Projections, published quarterly with each participant's dot, has consistently failed to forecast its own rate path more than a few quarters out. Participants were projecting a federal funds rate near zero through 2023 as late as the December 2020 meeting.

The Fed's balance sheet tells the same story. It stood near $900 billion in mid-2008. It peaked around $8.9 trillion in April 2022, after two rounds of emergency expansion totaling roughly $4.8 trillion between March 2020 and early 2022. Then the committee reversed and began shrinking it. Then in March 2023, when Silicon Valley Bank failed with about $209 billion in assets and Signature Bank followed with roughly $110 billion, the Fed opened the Bank Term Funding Program and lent against underwater Treasuries at par. Borrowing under that facility peaked around $165 billion. The institution tightening to fight inflation was simultaneously expanding emergency credit to banks that had been destroyed by the tightening.

None of this is incompetence by individuals. Kashkari is thoughtful and Schmid is careful. The problem is structural. Twelve people are setting one price for the entire term structure of credit in a $29 trillion economy, using data revised months after the fact, through a transmission channel with lags of six to eighteen quarters. When Kashkari says he does not know how much more is needed, he is describing the job accurately.

Who Pays for the Uncertainty

Uncertainty at the FOMC is not a seminar topic. It is a transfer of risk onto people who had no vote.

Start with housing. A buyer who financed a $400,000 home at 3 percent in 2021 pays roughly $1,686 per month in principal and interest. The same loan at 7.5 percent costs about $2,797. That is a $1,111 monthly difference on an identical house, produced entirely by the price of money. Sellers with 3 percent mortgages do not list. Inventory locks up. First-time buyers are priced out of a market where the asset is unchanged and only the financing moved.

Next, commercial real estate, which is what Schmid flagged. More than $1 trillion in commercial mortgages has been coming due across the 2024 to 2027 window, much of it underwritten when the 10-year sat below 2 percent. An office building financed at a 4 percent cap rate does not refinance at 7 percent without a capital injection or a loss. Regional banks hold a disproportionate share of that paper. They are the lenders Schmid supervises in the Tenth District.

Then there is the federal government, the largest borrower of all. Annualized interest expense on the public debt passed $1 trillion in late 2023 and has kept climbing as low-coupon debt matures and reprices. The Congressional Budget Office has projected net interest exceeding defense spending within this decade. Every basis point the FOMC adds raises the Treasury's cost of carry, which raises issuance, which pressures the long end that Schmid says is already restricting credit. The feedback loop is live.

The contrasting case deserves a fair hearing. The soft-landing camp, which includes a good share of Wall Street economists and the Fed's own staff, argues that the 2022 to 2023 experience vindicated discretion. Inflation fell from 9.1 percent toward the low 3s without a recession and without mass unemployment. The unemployment rate stayed below 4 percent for more than two years, the longest such stretch since the 1960s. On that reading, Kashkari's humility is a feature. A committee that adjusts to incoming data beats a rigid rule that would have crushed employment.

That argument has force on the disinflation. It is silent on the inflation. The 2021 to 2022 price surge destroyed real wages for roughly two years and transferred purchasing power from wage earners and savers to asset holders and debtors. Celebrating the cleanup while skipping the arson is not an evaluation.

The Case for an Exit

Here is the position. A monetary system whose stewards cannot state where rates should go is not a system that savers should be forced to use. Bitcoin's issuance schedule is the opposite claim. The block subsidy is 3.125 BTC, cut in half roughly every 210,000 blocks, with the next reduction expected in 2028. Total supply is capped at 21 million. Difficulty readjusts every 2,016 blocks to hold block intervals near ten minutes regardless of how much hash power arrives. Nobody convenes to decide the schedule. There is no dot plot, no dissent, no essay explaining a change of mind.

Critics call that rigidity a defect. In a credit crisis, Bitcoin cannot provide a Bank Term Funding Program. True, and that cuts both ways. A system that cannot bail out also cannot create the conditions that require bailouts: it cannot suppress rates to zero for a decade, cannot buy $4.8 trillion of assets in two years, cannot tell a generation that inflation is transitory. The absence of a lender of last resort is the price of the absence of a monetary planner. Schmid describes the long end imposing discipline the committee did not choose. Bitcoin imposes that discipline on the money itself, permanently, on everybody, including governments. That is what makes it a political technology, not just a trade.

Austrian economists made the epistemic point long before Bitcoin existed. Hayek's argument against central planning was never that planners are stupid. It was that the knowledge required is dispersed across millions of actors and cannot be aggregated into a committee room. Kashkari just restated that argument from inside the committee room. He deserves credit for the honesty. The correct response is not to wait for a better forecaster. It is to stop needing one.

What to Watch

The long end versus the committee. If the 10-year Treasury keeps rising while the FOMC holds, Schmid's framing wins and the Fed becomes a passenger. Watch the term premium component specifically. A rise driven by term premium, not expected policy, is the market pricing fiscal risk rather than Fed intent.

Regional bank credit. Commercial real estate losses show up in loan loss provisions and non-accruals before they show up in failures. Quarterly filings from banks with heavy CRE concentration in the Tenth and Ninth Districts are the leading indicator Schmid is watching. Expect at least one more supervisory tightening on CRE concentration limits before this cycle ends.

Whether Kashkari's uncertainty becomes consensus language. If other presidents adopt the same phrasing, the committee is signaling that forward guidance has been abandoned in practice. That raises volatility in rates markets, which raises the cost of hedging, which raises the cost of credit. The admission has a price.

Federal interest expense as a share of receipts. This is the constraint that eventually overrides everything the FOMC says it wants. When servicing the debt crowds out the discretionary budget, the political pressure runs one direction only, toward tolerating inflation.

Bitcoin's response function. The naive model says higher real rates hurt a non-yielding asset. The 2022 drawdown supported that. The longer-horizon model says repeated demonstrations that the monetary authority is improvising increase the value of an asset with a fixed schedule. Watch which model the market prices over the next four quarters, and watch it in the cost basis of long-term holders rather than in weekly flows.

Kashkari said he does not know. Take him at his word, and then ask why anyone should hold their savings in an instrument managed by people who have told you, on the record, that they are guessing.

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Go deeper: Inflation Is a Tax

Source: BlockMedia