Kashkari Backs 3 Rate Cuts as Labor Market Concerns Outweigh Inflation Risks

The Federal Reserve’s Minneapolis President Neel Kashkari has shifted his stance on monetary policy, advocating for additional interest rate reductions in 2025 as he reassesses the balance between inflation risks and labor market dynamics. Kashkari, who does not hold a vote on the Federal Open Market Committee (FOMC) this year, recently endorsed three rate cuts by year-end, surpassing his earlier projection of two reductions. His revised position reflects concerns over a weakening labor market and the muted inflationary impact of President Donald Trump’s tariffs, which he argues are unlikely to drive prices significantly higher than current levels of 3.1% annual core inflation Kashkari advocates two more rate cuts this year as he sees limited tariff impact on inflation^[1].

Kashkari’s analysis hinges on the interplay between economic growth and policy neutrality. He estimates the neutral real interest rate—where monetary policy neither stimulates nor restrains the economy—at 3.1%, a level he attributes to structural factors such as productivity shifts and tariff-driven capital costs Federal Reserve's Kashkari questions number of rate cuts to achieve neutrality^[4]. This suggests that even a series of rate cuts may not substantially lower long-term interest rates, limiting relief for sectors like housing. Kashkari also emphasized the need for flexibility, stating the Fed should pause or even raise rates if inflation accelerates or the labor market proves more resilient than expected Fed's Kashkari sees two more cuts coming; says central bank remains cautious^[2].

The FOMC’s recent decision to cut the federal funds rate by 25 basis points to 4.00%-4.25% aligns with Kashkari’s more dovish outlook. The 11-1 vote, with only Governor Stephen Miran dissenting in favor of a larger cut, underscores the committee’s divided views. Kashkari’s advocacy for two further reductions in October and December is supported by eight of his peers, while eight others favor one or no additional cuts Fed rate decision September 2025 - CNBC^[5]. The central bank’s “dot plot” projections now reflect a median expectation of two rate cuts this year, with officials signaling one reduction in 2026 and a gradual approach to reaching the long-run neutral rate of 3% by 2027 Fed rate decision September 2025 - CNBC^[5].

Inflation remains a critical challenge. While Kashkari acknowledges that core inflation exceeds the Fed’s 2% target, he argues that the recent slowdown in job creation—with unemployment rising to 4.3% in August—poses a greater risk to the dual mandate of stable prices and full employment. He attributes the hiring slowdown partly to reduced immigration but notes that labor demand has also weakened, necessitating policy support Fed’s Kashkari Sees Two More 2025 Cuts Given Hiring Slowdown^[3]. The Fed’s forward guidance has shifted from describing policy as “moderately restrictive” to “more neutral,” reflecting the September cut and the anticipated easing trajectory Fed rate decision September 2025 - CNBC^[5].

Political dynamics have further complicated the Fed’s path. Kashkari highlighted concerns over threats to the central bank’s independence, particularly under Trump’s administration, which has pushed for aggressive rate cuts to stimulate the housing market and reduce government borrowing costs. While Kashkari affirmed the FOMC’s commitment to price stability, he acknowledged the difficulty of insulating monetary policy from external pressures Fed’s Kashkari Sees Two More 2025 Cuts Given Hiring Slowdown^[3].

The broader implications of Kashkari’s stance suggest a potential recalibration of the Fed’s approach to balancing growth and inflation. With the neutral rate higher than pre-pandemic levels and structural trends like demographic aging and productivity shifts influencing long-term outcomes, the central bank faces a complex task in navigating the evolving economic landscape. Kashkari’s emphasis on flexibility and data-driven adjustments underscores the uncertainty surrounding the path to policy normalization in 2025 and beyond.