Neel Kashkari, President & CEO, Federal Reserve Bank of Minneapolis | Global Conference 2024

Current Economic Dynamics and the Neutral Rate

• Rapid disinflation occurred in the second half of 2023, bringing inflation down to approximately 3%, accompanied by stronger-than-anticipated economic growth.
• In the first quarter of 2024, inflation has moved sideways while economic growth remains resilient, suggesting monetary policy may not be exerting as much downward pressure on demand as historically expected.
• Kashkari posits that the neutral interest rate—the rate that neither stimulates nor slows the economy—may have risen in the short run due to U.S. reopening dynamics.
• The housing market has shown unexpected resilience despite 30-year mortgage rates rising to roughly 7.5%, challenging assumptions about policy transmission speed.

Interest Rate Trajectory and Scenarios

• The most likely current scenario involves keeping interest rates unchanged for an extended period to gain clarity on whether disinflation is continuing or has stalled.
• Rate cuts would be considered if disinflation resumes or if there is marked weakening in the labor market.
• Rate hikes remain a non-base-case possibility if inflation becomes entrenched at 3%.
• Kashkari notes that his March forecast of two rate cuts this year remains the upper bound; he acknowledges the possibility of only one cut or zero cuts depending on incoming data.

Key Data Indicators and Decision Criteria

• The Federal Reserve is data-dependent, monitoring both inflation prints and labor market conditions to determine policy shifts.
• Kashkari is concerned that new lease rates for housing have ticked up recently, which could feed into future inflation data over the next one to two years.
• To confirm inflation is under control, the Committee requires multiple positive inflation readings (a "constellation of data") rather than relying on a single good print following three consecutive bad ones.
• Monetary policy effects are already visible in credit card and auto loan delinquencies among subprime borrowers, though the transmission to the broader economy is slower than anticipated.

Credibility and the 2% Target

• The Fed remains committed to the 2% inflation target to maintain policy credibility; settling for 3% could signal that the Fed might accept higher inflation levels in future spikes.
• Failure to hit the 2% target could undermine confidence in the Fed's ability to control inflation during future economic cycles.

Political Independence and Financial Markets

• Kashkari explicitly stated that the upcoming November presidential election will not influence interest rate decisions, emphasizing that policy must be driven solely by economic data.
• Financial markets have displayed "exuberance" despite recent negative inflation prints, raising concerns that market pricing may be inconsistent with the restrictive stance needed to tame demand.
• Kashkari expressed skepticism regarding the "Blue Chip" survey of financial forecasters, noting that many respondents are former Fed economists, which may create a feedback loop of consensus rather than independent analysis.

Risk Assessment and Tail Scenarios

• Primary risks include underlying inflation stabilizing above 2% and the potential for accumulated rate hikes to impact the economy abruptly later than expected.
• Kashkari identified uncertainty regarding the sustainability of currently strong U.S. productivity growth, noting that productivity data often involves significant revisions.
• Commercial real estate and hidden risks in the global financial system (similar to the 2008 crisis) represent potential, unidentified sources of economic shock.
• Regarding the dual mandate, the Fed has not mathematically defined the trade-off between price stability and maximum employment, leaving the balance to the judgment of individual policymakers.

Supply-Side and Structural Constraints

• Kashkari views long-term housing supply constraints as a separate issue from the current monetary policy cycle, which focuses on the next two to three years.
• While high interest rates could eventually reduce housing supply, this is considered a long-term effect rather than an immediate driver of current policy decisions.
• Business feedback indicates that while pricing power has diminished compared to a year ago, underlying demand remains strong, and labor competition persists.