MNI BRIEF: Fed Kashkari Urges Banks To Prep For High Inflation

U.S. regional banks should put in plans to "endure a high inflation scenario" so as to minimize wider financial stability issues triggered by higher interest rates, Federal Reserve Bank of Minneapolis President Neel Kashkari said Wednesday.

The Fed's inflation and stability goals can "come into tension if the high policy rates that are needed to bring inflation down trigger stresses in banks," he said in an online essay. "In this case, policymakers would face a choice: Continue the fight to bring down inflation or back off in order to reduce stress on banks." Bank supervisors should help regional lenders build resilience and reduce the risk of financial instability, including running high-inflation stress tests, encouraging banks to raise capital, sell assets or restrict payouts.

"Given the risks that these banks have taken on, the outlook for some regional banks largely depends on what happens to inflation," he said. "Central banks’ fight to bring inflation back to target and preserve anchored expectations must succeed." (See: MNI INTERVIEW: Fed Will Likely Hike Rates Above 6%-Plosser)