Now to our first newsmaker of the hour, Minneapolis Fed President Neel Kashkari. Our own Steve Leeman is joining us on set for this conversation as well. But Neel, first of all, thank you for coming into set today. It's great to see you.
Great to see you. Congratulations on your spin-off.
Thank you very much. Everybody's waiting to see what the Fed does this year. I know you've been pretty clear that it's going to be data dependent. You don't think the Fed should be automatically making moves in any direction. So let's get right to what you think about first the jobs market and second inflation. Where do you see things right now?
The job market is clearly cooling, no question about that. We see this in the national statistics. The unemployment rate is up to around 4.6%. There are questions on some of the data, but I think the unemployment rate is pretty clean at 4.6%. When I talk to businesses in my region, they also say they're not hiring very much, so that's a clear signal that the labor market is cooling. At the same time, inflation is still too high. I don't take the most recent inflation data seriously because of issues with data collection during the shutdown. Inflation is still too high, and the big question is how tight is monetary policy. Over the last couple years, we kept thinking the economy would slow down, but it's proven far more resilient than I expected. That tells me monetary policy must not be putting that much downward pressure on the economy. So my guess is we're pretty close to neutral right now, and we just need more data to see which force is bigger - inflation or the labor market - then we can move from a neutral stance in whatever direction is necessary.
But your gut tells you the labor market is maybe the bigger issue to wrestle with at this point.
Probably. I don't think we'll be surprised that inflation ends up much higher than we're seeing. The inflation risk is persistence - that tariff effects take multiple years to work through the system. Whereas I do think there's a risk the unemployment rate could pop from here.
That's really weird then, Neel, because we've been above 2%, 50% above 2%, for two years, then the Fed has totally missed that target and we've just cut four or five times. That makes no sense if you've moved the goalpost to 3%.
No, no, I don't think we've moved the goalpost at all. The debate we've been having at the committee is we know tariffs affect goods import prices. Do you count that as a one-time effect, or do you think it leads to something more persistent? That's the debate.
But the persistent inflation hasn't had anything to do with tariffs. It was already persistent long before the tariffs.
Because of the COVID effects, I agree with you, Joe. Some people say it's obvious we should ignore tariff inflation and just cut dramatically to support the labor market. I'm not there either.
But if 2% was really your target, you wouldn't have cut at all.
We have two sides of our mandate. Inflation is slowly trending down. The unemployment rate has gone from 3.6 to 4.6, so we're moving in the wrong direction on the labor market. We're slowly moving in the right direction on inflation.
Capitalism doesn't work that way.
Well, it just depends on capitalism.
It all depends. I'm just kidding, but a critic would say the Fed has moved the goalpost.
No, I hear you. It's been five years now with substantially elevated inflation that we should all be alarmed about.
But you blamed it on the pandemic, not on all the stimulus.
It's a combination of factors. The pandemic, positive stimulus, Russia invading Ukraine - all pushed prices up.
Neel, can you walk us through your outlook for next year? Does inflation come down slowly? What happens to the unemployment rate and what do you do with growth?
Growth keeps surprising me with its resilience. My expectation is the economy will continue doing what it's been doing - pretty resilient, decent growth. On inflation components, I've got confidence that housing services inflation is coming down. We've modeled the mechanism from new rent growth through CPI and PCE. Non-housing services should be tied to wages, which are slowly trending down. So it's going to be slow. The tariff-induced goods inflation - will we see repricing in January? Businesses have said there could be repricing this year as they reset prices. On the labor market, I expect continued low hiring but low firing. Businesses are using AI, which affects their hiring plans. So my guess is the unemployment rate moves sideways, inflation slowly trends down.
That's the policy side. What about the makeup of the committee? We were talking about whether Fed Chair Powell stays on. What's your expectation?
I have no idea if he stays on. He's done a wonderful job as chair. None of us are perfect - he's not perfect, I'm not perfect, the committee is not perfect. But overall, he's done an excellent job, and I'd love to see him remain as a colleague as long as he likes.
You would. One concern is about the makeup of the Fed with appointees from the president having the power to fire presidents. You're the president of the presidents, right? The conference of chairs. Are you concerned that presidents could be fired individually for lack of cause?
I'm not concerned about that. The Federal Reserve Act is built on a foundation of 12 independent Federal Reserve banks. We presidents serve at the pleasure of our local boards of directors. They have the power to oversee me and remove me. That's where the power lies, as opposed to in Washington.
You're on the board of the Economic Club of Minnesota. I hear Secretary Bessent is going to be speaking there. Is this a real economic club or just a facade where you get big grants?
