Fed's Kashkari says his biggest fear is inflation will be more persistent

Minneapolis Federal Reserve Bank President Neel Kashkari said on Tuesday his biggest fear is that the U.S. central bank misreads the extent and persistence of price pressures and will need to deliver even more aggressive rate hikes to control inflation.

Kashkari is already the most hawkish of all the central bank's 19 policymakers and expects the Fed to need to lift its policy rate, now at 2.25 per cent-2.5 per cent, another two full percentage points by the end of next year.

"The big fear that I have in the back of my mind is, if we are wrong and markets are wrong and that this inflation is much more embedded at a much higher level than we appreciate or markets appreciate, then we are going to have to be more aggressive than I anticipate, probably for longer, to bring inflation back down," Kashkari said.

Right now, he said, it's "very clear" the Fed needs to tighten monetary policy.

If inflation were at 4 per cent, he said, the Fed could afford to go slow on rate hikes to make sure it doesn't overdo it and send the economy into a downturn.

But with inflation as high as it is, he said the Fed needed "to err on making sure we are getting inflation and only relax when we see compelling evidence that inflation is well on its way back down to 2 per cent."

Kashkari says his biggest concern is that if the Fed is "misreading the underlying inflation dynamics, then it's going to take us a while probably to figure that out, and then we are going to have to be even more hawkish than I am envisioning right now."