China's lockdowns could drive more U.S. policy action, says Fed's Kashkari By Reuters

© Reuters. FILE PHOTO: President of the Federal Reserve Bank of Minneapolis Neel Kashkari speaks during an interview in New York, U.S., March 29, 2019. REUTERS/Shannon Stapleton

(Reuters) -If lockdowns in China aimed at containing COVID-19 cause further disruptions to global supply chains, the Federal Reserve will need to take even more aggressive action to bring down "much too high" inflation, Minneapolis Fed President Neel Kashkari said on Tuesday.

Speaking at an event at Luther College in Decorah, Iowa, Kashkari said in the best case scenario, the pandemic fades into the background, supply chains recover and more supply comes back on line.

That would help reduce upward pressure on consumer prices, which rose 8.5% in March, the fastest pace since late 1981.

If that doesn't happen, Kashkari said, "then our job will get harder ... and we are going to have to do more, through our monetary policy tools, to bring inflation back down."

The Fed began raising interest rates last month, and is expected to ramp up its rate hikes starting next month to slow demand for goods and services and bring it into better balance with constrained supply.

As recently as six months ago Kashkari thought inflation would recede on its own without the Fed tightening monetary policy; he has since joined the rest of his central banking colleagues in believing the Fed does need a series of rate hikes this year to do the job.

But Kashkari's remarks underscored how much the U.S. central bank's success in fighting inflation depends on forces outside its control.

Other Fed policymakers have repeatedly hit this theme as well in recent weeks, not just because of China's lockdowns but also as Russia's invasion of Ukraine sent energy and food prices soaring globally.

Both push up on inflation, but could also pinch economic activity. The International Monetary Fund this week slashed its forecast for global growth in 2022 to 3.6% from an earlier estimate of 4.4%.

How the U.S. economy shapes up in the coming year will depend "on the virus, it's going to depend on what happens in Ukraine," said Kashkari. "Those are giant elephants that will determine what will happen in our economy as well."

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