Minneapolis Fed President Kashkari: Expect inflation to continue to come down this year

Thanks, Steve, for having me.

You know, it's not worrisome, but it's important to try to understand what's driving it. So I spend and my colleagues spend a lot of time trying to dig into the details to understand the moves. As you know, since we started cutting rates in September, the ten year didn't go down. It went up. Right now it's up about 80 or 83 basis points relative to where it was when we started our cutting cycle, which is counterintuitive. When I dig into the data, around 40% of that move is in inflation compensation, which ultimately we control. You might interpret that to say markets saw a more dovish than expected Fed and then boosted inflation compensation a little bit. I'm not worried about that. We will get inflation down to 2%. We're committed to that. The balance, the other 60% of it is really about real rates. And what's driving long real rates? There are a couple explanations that I'm focused on. One is I think there's great uncertainty about where the neutral rate is. And the longer the economy continues to exceed expectations on growth and resilience, I think people and markets are taking signal that the neutral rate may be higher. And then you've got the residual or what we call the term premium. That a lot of things go into that. One possibility is fiscal deficits. Larger deficits, all else equal, would tend to tick up the term premium. And so where does this all shake out? We're going to get inflation back down. But then ultimately what the executive branch and Congress do on the fiscal side, and ultimately what our growth trajectory is, are we in a period of higher productivity and higher investment that would tend to push up long rates? And so how that nets out, we're just going to have to wait and see. But we're going to get inflation down.

Yeah, I think of all the data that we just looked at that you just mentioned, and I have to go through the details, I think the most important one is 4.0% unemployment rate. This is still a good labor market. It's not as hot as it was a year or two ago. And I validate this data by talking to businesses all around the region and around the country. And overall, the feedback that I'm getting is the economy is strong, businesses are optimistic. It's a cooler labor market than a year ago, but they're still having to work to find the workers that they need. And so I think the economy is in a good place. We want to keep it there while getting inflation all the way back down to our target.