Immigration Spike Fuels High Inflation and Interest Rates


Surging immigration is maintaining high inflation and interest rates, according to Neel Kashkari in an interview with the Telegraph.

U.S. borrowing costs are expected to remain unchanged for “an extended period of time,” Kashkari cautioned.

He is particularly concerned about the surging demand for housing, which remains robust despite high rates.

Kashkari noted that the “dramatic increase in immigration” is driving housing demand. The rise of remote work and years of underbuilding are exacerbating the situation, creating a perfect storm that keeps the housing market extremely active.

“[If the] dramatic increase in immigration were to be sustained, I think it would have a meaningful imprint on the economy,” Kashkari explained to the Telegraph.

“Housing is traditionally the most interest-rate sensitive sector of the economy. It has shown remarkable resilience and even some signs that new leases are increasing,” Kashkari mentioned. “This is particularly concerning because it takes a year or more for new leases to impact the actual measured inflation number. If new leases are now rising, that’s especially troubling.”

Kashkari pointed out that the U.S. failed to construct enough homes in the decade following the financial crisis and the bursting of the mortgage bubble, leading to a housing shortage. Concurrently, demand for housing rose post-pandemic.

Since July 2023, the Fed has maintained interest rates between 5.25 percent and 5.5 percent. Initially, Fed officials and financial markets anticipated multiple rate cuts this year.

However, inflation spiked to a 3.4 percent annualized rate in the first quarter of the year, alarming markets and prompting Fed officials to reassess their plans. Fed Chairman Jerome Powell recently indicated it “will take longer than previously expected” to achieve the two percent inflation target.

Kashkari stated that rate cuts are not likely in the near future. He has not ruled out the possibility that the Fed’s next move could be an interest rate increase, although he sees this as unlikely. He believes the Fed will probably maintain current rates longer than many expect.

“I think the balance of risks suggests it will likely be down, but we shouldn’t rule anything out at this point. I believe a more likely scenario is that we stay at current levels for an extended period of time,” he said.

“In the second half of last year, we observed very rapid disinflationary progress, which was comforting because the economy was strong and inflation was falling quickly. I expected and hoped that this would continue in the first quarter of this year [but] inflation has essentially remained stable,” Kashkari said.

Similar to other Fed officials, Kashkari stressed the need for solid evidence that inflation is returning to 2 percent before he feels comfortable with rate cuts.

“I want to see proof that inflation is significantly heading back towards the 2 percent target. I’m not saying we need to fully reach 2 percent before starting to cut rates, but I need to be convinced that’s the trend before I would be comfortable normalizing interest rates,” he stated.

John Carney
John Carney
Before I became a journalist, I practiced law at Skadden Arps and Latham & Watkins.

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