Trump Tariffs Could Cause More Inflation: Neel Kashkari

I don't know the nominee there for Treasury. I've never met him, so I don't have an opinion one way or the other. Obviously, it's up to President-elect Trump to nominate who he would like and then for the Senate to consider and confirm those appointees. At the Fed, at the end of the day, no matter who is in these various positions, we know what our job is. We have to get inflation all the way back down to our 2% target and we have to try to keep the labor market strong. And we're committed to doing that regardless of who's in the executive branch or Treasury.

It's still a reasonable consideration right now. We know that inflation is somewhat above our target. It's running at around a 2.5%, 2.6% run rate right now. I have some confidence that it's gently trending down. And right now, the labor market remains strong. The question in my mind is, where is the neutral rate environment? We've had relatively high interest rates relative to the prior 10 years, and the US economy has continued to grow with great resilience and the labor market has been resilient. So how do I reconcile the fact that the policy rate has been relatively high and growth has been sustained? That suggests to me that perhaps the neutral rate environment is higher than it was in the past and that perhaps monetary policy is not putting as much downward pressure on the economy as I would have expected. And so this is what I'm trying to understand right now: how much downward pressure are we putting on the economy and what is the path for inflation? But right now, knowing what I know today, still considering a 25 basis point cut in December, it's a reasonable debate for us to have.

Well, you're making good points that would argue in favor of not cutting rates. On the other hand, if I look at the underlying components of inflation, goods inflation has fallen all the way back down to pre-pandemic levels. Services inflation is trending down, and that's tied to wage growth, and wage growth is slowly trending down. And what's left is housing inflation. Housing inflation is still high, but if we look at forward-leading indicators of where housing inflation is likely going, and that's the inflation of new rents, that new rental inflation has already come back down. So that suggests that housing inflation ought to come back down. Ultimately, we want to get inflation back down to our 2% target. We're not aiming to undershoot it. And so we do have to make some judgments about what is the path ahead for inflation, and that's going to be an important determinant on what we do with monetary policy.

Well, we know there's a wealth effect through the stock market. People feel wealthier and then it leads them on the margin to spend more. At the same time, stocks are highly volatile. Stocks can go up with some exuberance and then they can pull back with just as much force. And so I certainly wouldn't want to overreact to short-term movements in the stock market. At the same time that stocks have rallied, we've also seen bond yields climb, the long yields climb over the last couple months. Now the 10-year Treasury running at around 4.2% or 4.3%. And trying to understand what's causing those long-term bond yields to climb, one story is markets are pricing in a higher growth environment, perhaps a higher productivity environment. Another possible story is they're pricing in deficits going large, deficits going forward. I think part of it, maybe it's a little bit of both. And so understanding what's driving those Treasury yields, I think, is also an important factor for us as we think about where is the underlying trajectory of the US economy headed. So the stock market gives us some information, the bond market also gives us important information, as well as all the fundamental data that we look at every day.

You know, there's obviously the risk of potential tariffs back and forth between the US and China, which are notable. The other big concern is just the domestic Chinese economy and the slumber that it appears to be in. From our analysis, the heavy weight of the housing sector, which has been a driver of Chinese growth for so many years, now appears to be weighing down the Chinese economy and just the struggles that the Chinese economy is facing. And so something that I'm watching a lot is what the policymakers in China do and can they get the Chinese economy on a stronger, sustainable growth path. You know, re-inflating, so to speak, their housing bubble doesn't seem like it's a long-term strategy. So what is China's growth strategy? I agree the potential tariffs between the US and China and back and forth is something to pay close attention to, but I think China's own domestic challenges are also notable.