According to the dovish members of the Federal Reserve, there is a 40% probability that the Fed will continue to raise interest rates significantly.

Neel Kashkari, President of the Minneapolis Federal Reserve, expressed in an article titled "Has Policy Tightened Enough?" published on Tuesday that the United States may be heading towards a scenario of "high-pressure equilibrium", characterized by sustained economic growth and strong consumer spending.

In this scenario, inflation will decrease but remain above the Federal Reserve's target of 2%, meaning that inflation will stay high. This poses a challenge for the Federal Reserve, as policymakers will need to substantially raise interest rates. Kashkari believes that there is a possibility of nearly 50% that interest rates in the United States will need to continue to rise significantly in order to lower inflation.

Kashkari explained that the basis for his viewpoint is that most of the observed slowdown in inflation so far has been due to improvements on the supply side, such as workers reentering the labor market and supply chain issues being resolved, rather than monetary policy suppressing demand.

Despite the tightening of monetary policy by the Federal Reserve, Kashkari pointed out that interest rate-sensitive sectors such as housing and automobiles remain strong. This raises the question: how tight is current policy? If policy is indeed tight, would we observe such strong economic activity?

Data released on the same day, Tuesday, showed that the S&P/Case-Shiller National Home Price Index in the United States reached a new record high in July after seasonal adjustment, rising for the sixth consecutive month. The year-on-year increase in housing prices was 1%. As of the latest data in July, the index has risen by 5.3% since the beginning of this year, offsetting the cumulative 5% decline in prices during the market slowdown period from the peak in June last year to January this year.

Inflation in the services sector, excluding the cost of rental housing, has already declined but remains high, raising concerns about the long-term outlook for inflation. Kashkari wrote, "Once the disruptions on the supply side are fully resolved, will policy be tight enough to accomplish the task of bringing service inflation to target? Perhaps not. In that case, we will have to raise the federal funds rate, possibly significantly. Today, I think there is a 40% chance of this scenario."

Kashkari's probability forecast still implies that he believes there is a 60% chance that the Federal Reserve will achieve its goal of a "soft landing", where inflation returns to target without a severe economic downturn. Kashkari cited some current conditions to demonstrate a decent probability of achieving this positive scenario. He pointed out, "We have made substantial progress in combating inflation and the performance of the current labor market, which helps the Federal Reserve achieve its inflation target."

Kashkari acknowledged the progress the Federal Reserve has made so far and the market and consumer expectations that inflation will continue to decline, but he stated that the neutral interest rate in the current era may have already risen, necessitating a tighter monetary policy. Like some of his colleagues, Kashkari expects interest rates to remain at higher levels for a longer period of time.

Kashkari has long been considered one of the more dovish senior officials at the Federal Reserve. However, the situation has changed recently. In the past few months, due to concerns that inflation will persist above target, he has shifted to a more hawkish stance than before. Kashkari is a voting member of the FOMC this year. Last week, he voted to keep interest rates unchanged, but also hinted that there may be another 25 basis point hike before the end of the year.

Kashkari warned that interest rates could rise significantly, echoing the views of JPMorgan CEO, Damon, during an interview this week. Damon stated that the worst-case scenario is that the Fed could raise the federal benchmark interest rate to 7%, and the world may not be ready to cope with that. Going from 5% to 7% would be more painful for the economy than going from 3% to 5%. As for what will happen in the market at that time, Damon quoted Warren Buffett's famous saying that you only know who's swimming naked when the tide goes out, and that will be the moment when the tide recedes. Currently, the target range for the federal funds rate is 5.25%-5.5%.