Q&A with Neel Kashkari at the Midwest Economic Outlook Summit

Sure, Jim. Well, first of all, thanks everybody and please call me Neel. This will be a lot more fun for me if we make this a casual conversation. It's great to be back at this event. This is a terrific event. As you just heard in the introduction, this region is covered by the Minneapolis Fed. And so, our jobs are to understand what's happening here in our local economy. And then I go back to Washington DC every six weeks for FOMC meetings, meetings of the Federal Open Market Committee where we set interest rates for the nation. And part of my job in those meetings is to represent what's happening here in our regional economy. So meetings such as this and yesterday we did a roundtable with small businesses and other events. Meetings like this give me information on the ground what you all are experiencing. So the more we make this interactive, the more you offer comments and questions, the more I can take away from this. And so I really appreciate the opportunity to visit with you. Just very quickly, you all know coming out of the pandemic, we had very high inflation and we all felt it. You felt it in your businesses, you felt it at the grocery store. Inflation has come down quite a bit. By the way, we measure it. It's running at somewhere around 2 and a half to 3% inflation. Somewhat affected by the fact that tariffs went up a lot last year, but that's probably a short-lived event. I mean, it's like prices go up, but they shouldn't keep going up from there. At the same time, the labor market has remained pretty resilient. The unemployment rate got down to as low as around three and a half nationally. Now, it's up around 4.3%. So, it's a softer labor market than it was a year or two ago. But, as you look out across the country, the job market seems pretty decent to pretty good. So, we're trying to balance off. You'll hear us talk about a dual mandate. We want to get inflation at 2% and we want to have as many Americans working as possible. And sometimes we have to trade these things off. And so right now we're missing or we're close on both. And we've cut interest rates a bunch in the last couple years. My guess is we're pretty close to neutral on where our monetary policy is. But ultimately we need to see where does inflation go. Does it come all the way back down to 2%. What happens to the unemployment rate? Does it keep going up or does it level off or does it come back down? That's ultimately what I think will guide our decisions going forward. But I'm excited to be here and excited to hear from you, Jim, and all of the folks in the audience.

Sure. Well, we move. If we think that inflation is too high and we need to bring inflation down, the central bank will raise interest rates. If we think that the economy is limping along and we need to give it a boost, typically the central bank will cut interest rates. Now, the interest rate that we move up and down is an overnight interest rate that banks lend to each other. So, why do you care about that? I mean, the truth is you don't. But it has some effect on longer term rates. So ultimately, it has some effect on what mortgage rate you end up paying. If you go out to get a 30-year mortgage, there's a chance that our monetary policy moving up and down will affect those mortgage rates. It'll affect the rates that you pay on your credit card balances if you keep credit card balances. Those will go up if we raise interest rates. So by raising interest rates, we make it more expensive for American families and businesses to borrow money, which is a way of tapping the brakes gently on the economy. And by cutting rates, we release the brake. And in a sense, you could be even tapping the gas to make it to say, 'Hey, now is the time to go out and borrow.' Mortgage rates went way down, for example. So, you know, during the pandemic, interest rates were basically at zero. Our interest rates, you could go get a 30-year mortgage for something like 3%. So, a flood of people both bought homes and refinanced their mortgages. That was partly in response to the economic decisions that we made. Now, 30-year mortgage rates are closer to 6%. And so, I hear a lot from families saying, 'Hey, I can't afford to sell my home because I've got a 3% mortgage. I can't trade that in for a 6% mortgage. That makes no sense.' And so, this does have real effect on everybody at the end of the day.

That's not true. All right. That is, you know, we did a prep call and this was not in the prep call. I just want to point that out.

Thank you.

I mean it's mixed. It's very sector specific, right? Ag has been under pressure for many years that continues to be under pressure. Healthcare has unique challenges all around the country including here. I heard from some manufacturers that are doing better and doing reasonably well. I heard from some services industries that are doing well. So it is very sector specific. Overall I heard cautious optimism that hey the year ahead the next couple years looks pretty good. I will say this though something different I heard whenever I come to North Dakota and I've been in Minnesota for 10 years. I come here at least once a year if not twice a year to North Dakota. This part of America is structurally short of workers. Like the over I mean I hear about affordable housing. I hear about affordable child care and I hear about we can't get the workers that we need. Yesterday for the first time in 10 years I heard businesses in North Dakota tell me we're fully staffed. That is a notable difference to what I normally hear. And it, you know, I don't want to overreact to it, but that makes me think, okay, this 4.3% national unemployment rate. You know, you could look at 4.3 as a low unemployment rate historically or one that's almost a point higher than it was a couple years ago. Makes me cautious that maybe the labor market is not as sound as some of the statistics would imply.

Well, we try, you know, so each of the 12 reserve banks has research departments of PhD economists who are constantly looking at all the data and using the data that we have historically and currently and trying to make predictions about the future. And we're always running different experiments to see how do we get a better sense of where the economy is headed because we know if we raise interest rates today or we cut interest rates today, it does not generally have an immediate effect. It might take a few months, it might take a year or more to fully feed through the economy. And so we need to be forward-looking and we try to be forward-looking. So we're always looking for better indicators of where the economy is going rather than just anchoring ourselves to historical data. So we look at all of the above to try to get a sense of where the economy is going. And by the way, conversations like this and visits like this also feed into that process to get a sense of are people feeling optimistic or are they feeling pessimistic. So yes, we do use backward-looking data as an input into our assessment of the economy, but we make many many many efforts to look ahead at where the economy is going to be six months from now, a year from now, and two years from now.

Sure. You know, I mentioned all 12 reserve banks have independent research departments that are always studying the economy and sometimes people put out results that point one way and another reserve bank will put out results that point the other way. This is how we're trying to get better and learn about the economy by having this breadth of opinions. I thought that Director Hassett's comments though, you know, he went on and he said that he disagreed with the results and the researchers should be punished or they should be disciplined for their conclusions. I think this is just another step to try to compromise the Fed's independence. Over the last year, we've seen multiple attempts to try to compromise the Fed's independence, including in December when the Department of Justice served a subpoena to the board of governors over some building expenses. It's really about monetary policy that you know we are doing our very best to make the best assessment of the economy based on data and analysis. If you look all around the world, every advanced economy in the world has an independent central bank. The reason they have an independent central bank is because politicians of conservative and liberal would rather have monetary policy that serves their political needs in the moment. And what economies all around the world have learned is that monetary policy decisions, the people are better off over the long run if monetary policy is based on data and analysis, not on short-term political gains. And I know that my colleagues at the Fed and I are committed to continuing to make the best decisions we can. We're not perfect. We don't get it all right, but we're going to do our best to make the best decisions we can based on data and analysis and not let anything else distract us from that.

Yeah. Well, it's a great question. The louder the political noise gets turned, the more we stick to what are our goals. So, Congress created the Federal Reserve in 1913. Congress passed a law called the Federal Reserve Act that created the Federal Reserve system. And over time, Congress has given us our assignments. They've told us, Fed, you go deliver maximum employment and stable prices. So, as many Americans are working as possible, and what we've defined stable prices as 2% inflation. So, the louder the noise gets turned up, the more we hug the mast of what is our mission. Our mission is maximum employment and stable prices. And just continue to double down on just focus on that. And then we're able to tune out the noise and I think we've done it pretty well.

Well, I'm optimistic about AI today. You know when I talk to businesses especially larger businesses almost every business I talk to says that they are using it in some way and finding real benefits from it. You know I always I like to joke it's only partially a joke. You know if I asked you raise your hand if you have used AI chat GPT Gemini one of these tools in the last week and I bet most hands will go up. A lot of hands have gone up. Now raise your hand if you've bought or sold something with Bitcoin. Okay, crypto's been around for more than a decade and it's utterly useless. AI has not been around very long and people are using it every day. And so this is demonstrating to me that this thing is real and it has real long-term potential for the US economy as opposed to crypto. And so I'm excited about AI. I'm bullish. I think it could be a boost for productivity in the next five years, in the next 10 years, maybe and beyond. In terms of the Fed, we are very cautious about it for our own use because of confidentiality reasons. Like we can't put in, you know, I'm not going to go into chat GPT and say, 'Hey, what do you think we should do with monetary policy?' Because that's going to go into the ether, right? So, we've got very strong guardrails around how we use it. But our researchers, our independent researchers are using it in their research, but we're not letting any confidential Fed data get into the system because we don't know where it's going to end up going.

I you're absolutely right. I think oftentimes we're building products in search of a business case. And I think the best business case that I have heard of that could make some sense is cross-border payments, moving money with less friction and less cost. Today's current rails, there's a little bit more friction, a little bit more cost to it, but those are things we could also fix on our own. I agree with you 100%. I can send you money right now and you can receive it darn near real time. Right. And this is maybe a faster version of that. But I'm a big believer that we need to keep these payment systems within the financial services systems and keep those in the deposit realm because once they start leaving the deposit realm and going to other third parties, they're not going to be available to be lent in markets like Fargo and other places like that. So I'm very cautious about stable coins and other things. I think it will put up pressure on the economy because banks will lend less.

Great thoughts. Appreciate that.

Now. You've just torched my credibility to the extent I had any credibility. It's gone.

I grew up in Northeastern Ohio, so it's in the blood and it's I can't do anything about it.

I mean, I wish there were. I think the answer is unfortunately there's not much we can do. Our remit is monetary policy. And it's not even monetary policy just for North Dakota. We don't set a different monetary policy for North Dakota and for California and New York because we all use the same dollar. We're all part of the same economy. And so we have to set monetary policy for the country as a whole. And then there's all the other policies that are out there that affect us. Fiscal policy. How much are we taxed? Who gets taxed? What does that money get spent on? Then you've got tariffs and trade policy. Those are all outside the remit of the Fed. We don't have it's not our job and we don't have any ability to influence that and so nor should we. So that is really the job of elected leaders to represent this region and in that electoral process in Washington and that policy process in Washington. All we do the only interaction we would have with that is we do research like when policies change when a tax policy changes or tariff policy changes we want to understand what does that mean for the US economy. So, we will do research and publish our research of what do we think that this means. But we're not trying to weigh in on, hey, should they do this or not? Those are political decisions for our political system.

I mean, it's certainly a challenge. We know that immigrants have filled a lot of construction jobs historically. And so, you know, immigration, this was a big policy change in the last few years. You had massive immigration in the prior administration and now basically net zero immigration roughly last year and ongoing right now. So this is a big change in availability of these workers to fill the jobs that they were filling. And so I would expect it to have some effect on the construction industry. And you know you go around you say well why are homes so expensive? Why is affordability such a challenge? Why have we not built more homes? Like we are structurally short of housing across the country. That's why things feel so unaffordable. You know, interest rates are part of it, but I think a fairly small part of it. It's zoning restrictions that are local. I even heard in North Dakota yesterday and I said I thought that North Dakota was the low regulation state and yet I heard examples of zoning restrictions that are causing home prices to be higher here than they otherwise needed to be. But then cost of materials and cost of labor. I mean those are the big inputs that go into building a new home or building an apartment building. And so if we have fewer workers to build apartment buildings and homes then on the margin there fewer of them will get built and or they will cost more money. And of course we also know about the massive data center construction that is going on. I think that that is drawing capital to that sector but I also think that that is drawing workers to that sector to build those things. And you know, people say, 'Oh, I'm worried that my skilled electricians are not going to be available because some of the data centers are going to be able to pay more.' And that's, you know, this is life in a market economy. If there's a major investment in one sector of the economy, it's going to draw resources from other sectors of the economy.

Well, inflation was very high. I mean, we all saw it, right? Depending on how you measure it, seven, eight, even nine percent coming out of the pandemic. So, we raised interest rates aggressively. We did it to bring inflation back down. Now, if you go back and say why did inflation take off so much in the first place? Partly, it took off because of supply chains were screwed up because the services economy during the pandemic was shut. So, we were all buying goods because we couldn't go out to restaurants. So, we bought more goods. So, and those goods supply chains were screwed up. And then you had Russia invading Ukraine, which sent a commodity shock wave all around the world. So, it was a confluence of events that sent these prices through the roof. And then we raise rates aggressively to try to tamp demand down to help bring it back down. A lot of those supply factors got better and things have started to heal and inflation's been coming back down. So we cut interest rates as inflation started coming down while the labor market stayed remarkably resilient. When we raised rates as aggressively as we did, I thought we were slamming the brakes on the US economy. I was pleasantly surprised or another way of saying I was wrong. I was pleasantly surprised that the economy was really resilient even in the face of our high interest rates. And the economy did pretty well even while rates were much higher. And so we said, 'Okay, inflation's coming down. The labor market looks like it's hanging in there. We ought to cut interest rates because we don't need these high interest rates to bring inflation as far down anymore.' And so it's just the economy got better. The economy healed itself. That enabled us to bring rates back down. Not all the way to where we were before, but we've come down quite a ways.