Minneapolis Fed's Kashkari: Lower Interest Rates Likely This Year

Minneapolis Federal Reserve President Neel Kashkari expects interest rates to be lower later this year, as the central bank continues to make progress in bringing inflation down and the labor market shows signs of softening. In a recent interview, Kashkari expressed confidence that the economy is in a good place, and that further rate cuts may be appropriate to support both maximum employment and stable prices.

Kashkari's optimism is supported by recent economic data. Headline inflation in December ran at a 2.6% annual rate, according to the Fed's preferred personal consumption expenditures price index, while core inflation was 2.8%. Although still above the central bank's 2% goal, this represents a significant improvement from the peak of around 7% in 2022. Kashkari expects housing-related data, particularly on rents, to ease through the year and eventually bring prices back to target.

The labor market has also shown signs of softening, with the unemployment rate climbing from exceptionally low levels a year ago to a still-low 4.2% in August. Job growth has slowed from an average of 251,000 per month in 2023 to 116,000 per month the past three months. Other measures of the labor market, such as nominal wage growth and vacancies, have also eased.

Despite the softening labor market, other economic measures suggest ongoing strength. GDP and consumer spending continue to show surprising resilience, suggesting still-solid underlying demand. This resilience, along with the improving inflation picture, supports Kashkari's expectation of lower interest rates later this year.

However, Kashkari has also expressed concerns about the potential impact of trade tariffs on long-term inflation and the overall economy. He noted that one-time tariffs should not have a significant long-term effect on inflation, but a "tit for tat" scenario, where countries retaliate with their own tariffs, could lead to more uncertainty and potentially worsen long-term inflation. This uncertainty could make it more challenging for the Fed to accurately forecast inflation and make appropriate monetary policy decisions.

In conclusion, Minneapolis Federal Reserve President Neel Kashkari expects interest rates to be lower later this year, as the central bank continues to make progress in bringing inflation down and the labor market shows signs of softening. While the economy has shown resilience, uncertainty surrounding fiscal policy, particularly trade tariffs, could potentially impact the Fed's outlook on interest rates and the overall economy. The Fed will continue to monitor economic data and adjust its monetary policy accordingly to support both maximum employment and stable prices.