Fed's Kashkari on Inflation, Housing, Jobs Market

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Bloomberg Nov 13 19:54 · 13.1k Views

Federal Reserve Bank of Minneapolis President Neel Kashkari says inflation is heading in the right direction. But he says it's too soon to say if the Fed will continue on its rate cutting cycle.

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00:00 I saw some comments from you yesterday, and for our audience that might have missed them, I'll share them with our audience now we can pick up on them.
00:05 They'd have to be a surprise on the inflation front to change the outlook so dramatically.
00:09 If we saw inflation surprises to the upside between now and then, that might give us pause for December.
00:14 It'd be hard to imagine the labor market really heats up between now and December.
00:17 That's just not that much time.
00:19 Inflation data out just moments ago.
00:21 Anything in that to disrupt this easing bias that seems to have gripped the Fed over the last few months?
00:26 Well, first
00:27 of all, it's very fresh data, so I haven't had time to go through it in a lot of detail.
00:31 But at least on the headline level, it seems to be confirming the path that we're on.
00:35 We've made a lot of progress in the last year or so, bringing inflation down.
00:39 I need to go through the components of that release, which I have not done yet.
00:42 But generally speaking, goods inflation is back down to where we want it to be, where it was pre pandemic.
00:47 Services inflation, which is tied to wages, is gently trending down.
00:51 And then finally housing inflation we know is a lagging indicator.
00:55 We know that it takes a couple years for the new leases to turn over
00:59 and the new leases are showing that we're headed in the right direction.
01:01 So
01:02 right now I think that inflation is headed in the right direction.
01:05 We've I've got confidence about that,
01:07 but we need to wait.
01:08 We've got another month or six weeks a day to
01:10 analyze before we make any decisions.
01:12 One of the things that
01:13 has been very noticeable over the last week is the change in investors views about
01:18 where you're going to end up.
01:19 If you're looking at
01:21 SOFR futures
01:22 right now, the only price in about 75 basis point that's between now and the end of 2025.
01:28 Are we entering a period because we don't know what Donald Trump's policies are actually going to be,
01:34 where the dot plot, the summary of economic projections are kind of off the table, Can't really put a lot of faith in them.
01:41 And that maybe you're in
01:42 the Lael Brainerd attenuation phase where you slow down everything
01:46 and people should expect not a lot of
01:51 guidance from the Fed.
01:52 Well,
01:53 you know, the dot plot is something that I
01:56 at times I'm glad we have it.
01:57 And at times it's more of a frustration that we have to fill it out because there's so much uncertainty about the economic outlook.
02:03 Over the past year or two,
02:04 I've been surprised at the resilience of the US economy in the face of seemingly quite high policy rates.
02:11 Yet the labour market has stayed strong and the economic growth continues to surprise us.
02:16 So for me, I've been asking questions about where's the neutral rate
02:19 for the last year or two.
02:20 That's not about the election.
02:22 That's just about how the economy has been performing over the past year or two.
02:25 And so,
02:26 you know, for example, there's been revisions that suggested productivity is now higher than it had been in prior years.
02:32 If that higher productivity environment is maintained,
02:35 that would tell me we're probably in a somewhat higher neutral rate environment.
02:38 Again, that's not about the election.
02:40 That's just about how the economy is actually been performing.
02:42 And so for me as a policy maker, that's what's leading to my own uncertainty about where is our ultimate destination.
02:48 And I think that people are raising questions about what is the new administration going to do?
02:52 What is the new Congress going to do?
02:54 I think that's also adding
02:55 uncertainty about ultimately what's the growth trajectory of the US economy.
02:59 Well, Tom Barkin
03:00 said yesterday, your colleague from the Richmond Fed, that right now
03:04 there's no way
03:05 to know.
03:05 So
03:06 one has to just kind of assume that
03:09 things are going to be
03:11 maybe stuck inflation, stuck above 2%.
03:14 Would you join in that sentiment?
03:17 I'm not sure that
03:18 I'm ready to say that inflation is stuck above 2%.
03:20 I think it's right now running in the mid twos on a PCE basis.
03:24 And as I said earlier,
03:26 goods inflation is back down,
03:28 services inflation is tied to
03:30 wages and wages are gently trending down.
03:33 And housing inflation we know is going to take a couple years before completely
03:37 before the new leases roll all the way through the housing inflation.
03:40 So
03:40 I have confidence that inflation is headed in the right direction.
03:43 Is it headed there fast enough?
03:45 Do we want it to get there more quickly?
03:46 You know, we will see,
03:47 but ultimately that and the labor market are going to guide our policy decisions.
03:51 Well, back in September on the labor market, you said that the balance of risks had shifted towards a more weakening labor market.
03:57 Do you think we've backed off that risk?
03:59 Is it not as acute as it was
04:00 since we've had the data since September?
04:02 Yeah, We had seen some data piling up up until that September meeting, which was
04:06 pretty much pointed in One Direction, which was a a softening labor market.
04:10 We then had a surprise on the other way, the labor market looks stronger, but then a reversal in the subsequent job report.
04:16 And so I still think the labor market is softening.
04:18 A4 point 1% unemployment rate is a good unemployment rate.
04:21 It's a good labor market.
04:23 It's not as tight as it was a year ago or two years ago.
04:26 So there's there's
04:27 it's unquestioned that it has been softening.
04:30 And right now we're at a good place in the labor market and we want to keep it there.
04:34 You know, I do a lot of outreach to businesses large and small around my region,
04:38 as well as labor unions around my region.
04:40 Generally, what I hear is cautious optimism.
04:42 People feel good about the outlook,
04:44 but there are some trends that it's slowly softening and we just want to watch that carefully.
04:49 No, the election.
04:49 We've got to talk about the election.
04:51 And I know it's a difficult moment for the Federal Reserve.
04:53 I think it's a difficult moment for
04:54 monetary policy makers worldwide
04:56 for that matter.
04:57 The chairman down with it in the news conference and was pretty clear.
05:00 We don't speculate, we can't make assumptions,
05:02 but you're in the risk management business
05:05 and you've been in the risk management business for a long time.
05:07 It predates your experience at the Federal Reserve.
05:09 Do you think we've introduced two way risk
05:12 in 2025?
05:13 And when you think about the balance of risk, does that call for a slower approach to any move in monetary policy one way or the other?
05:20 Well, two way risk, I think we've already had two way risk.
05:22 So we've got risks of the labor market continuing to soften and over softening
05:26 and then we've got risks of
05:28 inflation potentially getting stuck.
05:29 I'm not seeing a lot of upside risks yet.
05:31 We don't know what's going to get enacted.
05:33 I'm not seeing a lot of upside risk that inflation's going to take off from here.
05:36 The bigger risk that I'd be concerned about in the inflation front is just if we're landing at around the 2 1/2 percent level
05:42 instead of back down to 2% level.
05:43 I think that those risks existed before the election
05:46 and I think that there continues to be uncertainty now and we need to just be
05:50 take our time, let the data come to us
05:52 and let that guide us.
05:53 Ultimately, for me, this goes back to the the discussion we had a moment ago about where's the neutral rate.
05:58 There's tremendous uncertainty in my mind about where the neutral rate is.
06:02 And the longer the economy continues to exceed expectations,
06:05 the more signal I take that we must not be as restrictive as I would have assumed.
06:10 Fed staff analyzed though during the first iteration of Trump the impact of the tariffs
06:15 and everyone coalesced around the this idea that there was a one off increase in inflation.
06:19 You can look through it.
06:20 It wasn't going to be this vicious cycle and ongoing inflation threat.
06:24 Did you agree with that assessment at the time
06:26 and do you still
06:28 think that that's what tariffs could do in terms of inflation?
06:31 I agree with that assessment at the time.
06:32 I still agree with that, but I think your prior guest touched on it, which is it really depends on what the other countries end up doing.
06:38 If there ends up being a tit for tat
06:40 and 1 country raises tariffs, they respond and you go back and forth indefinitely,
06:44 that could lead to a longer term imprint on inflation and potentially inflation expectations.
06:49 And of course, we don't know what our own tariffs are going to be, let alone what other countries are going to respond with.
06:54 And so we just need to be patient and see,
06:57 I had
06:58 a note come in from one of the Wall Street analysts that had a line that I thought was
07:02 really valid, and that is that if you're going to forecast inflation, you have to have a theory of inflation and what's causing inflation.
07:09 We've got
07:10 relatively strong labor markets right now and we've got concern about inflation.
07:17 Real interest rates just keep rising and they're working in opposition to your rate cuts.
07:22 What's your theory of inflation and how come
07:24 we're seeing this kind of real rate reaction?
07:27 Well,
07:28 I've done a lot of soul searching on why I missed the inflation run up in the 1st place.
07:33 I was surprised on the run up.
07:34 I was also surprised on the disinflation that followed it.
07:37 And the one thing that's been constant is it was not the labor market on the run up or the disinflation.
07:42 It was mostly supply factors.
07:45 And so, you know, supply chains got gummed up.
07:47 They took a lot longer to resolve.
07:49 The inflation took off.
07:50 You had the war in Ukraine also pushing inflation up and then many of those factors unwound or didn't get worse, bringing inflation back down
07:57 South.
07:57 Monetary policies role in my judgement in that in this episode
08:02 has been to keep in long run inflation expectations anchored
08:05 and it has
08:06 provided some gentle cooling to the labor market.
08:08 I don't think the supply factors
08:10 are what have caused the labor market to gently cool.
08:13 I do think monetary policy has been doing that.
08:15 And so
08:15 you, you put all that together, it says that when I thought we were applying 2 feet on the brakes of the economy with monetary policy,
08:22 we might only have been applying 1 foot on the brake.
08:25 And so this goes back to where ultimately are we going to settle?
08:28 We're going to have to let the economy guide us.
08:30 We are now paying as much attention to CPI again as we are to the labor market.
08:34 But the labor market comes up
08:36 in early December.
08:37 We had a really, really strong
08:40 September and a really, really weak October.
08:43 What do you
08:44 where, where is the labour market as far as you're concerned?
08:47 I, I think the labour market is in a good place right now.
08:49 Again, the, the anecdotes that I get, I look at the data, the official statistics, which always have uncertainty.
08:54 There's even more uncertainty about the labour market statistics, not just because of the Hurricanes and the Boeing strike,
09:00 but because of the
09:01 large immigration flows, which are
09:03 we're not exactly sure how big they are
09:05 and their time varying.
09:07 So what, you know, what is this month's break even level of job growth?
09:11 You know, your guess is as good as mine.
09:13 So I look at the official statistics and then I marry it to what
09:16 we're all hearing, my colleagues and I from all of our contacts around the country.
09:20 The labor market right now is strong.
09:21 It's a healthy labor market.
09:23 Jobs are available.
09:24 Businesses are feeling good.
09:26 We want to keep it that way.
09:27 And so as we get the data in, I'm going to continue to do my own outreach.
09:31 And all of the other presidents are going to do their outreach
09:33 to the businesses, large and small and labor groups to get a sense of
09:37 is the labor market cooling slowly?
09:39 Is it heating up
09:40 or is it cooling quickly?
09:41 And that will those will be important judgments
09:44 into our policy deliberations.
09:46 Your former colleague Bill Dudley wrote a Bloomberg opinion piece earlier this week basically saying that there's this possibility that Trump enacts policy quickly and forcefully in a way
09:55 that doesn't give the Fed enough time respond,
09:57 and without the proper tools to respond.
09:58 Is that a concern you?
10:00 You also share,
10:01 I think fiscal policy is always an input into our
10:04 deliberations, into our analysis and assessment of the economy.
10:07 I don't think that's new now.
10:08 And it's not just US fiscal policy, it's what happens with other countries, what happens with our trading partners.
10:13 And so
10:13 that type of uncertainty, we're used to dealing with it.
10:16 Obviously we would like to have less uncertainty, that'd be great, But it's the world that we live in and we will
10:22 take all the information we can as we get it and incorporate it into our thinking.
10:26 Speaking of uncertainty, there's been a lot of concern about what Trump 2.0 would mean in terms of jawboning the Fed and how he felt about Jay Powell.
10:33 The FOMC had this plan during the first iteration of Trump that maybe they even move Powell to chair of the FOMC.
10:41 If he was going to take over the chairmanship of the actual Fed,
10:45 would you basically all act as a group to potentially thwart anything that was coming at you that would negate the Fed independence?
10:52 We are all committed to our dual mandate goals.
10:54 Everybody around the table, all of my colleagues,
10:57 stable prices and maximum employment.
10:59 So number one, we're all committed to those goals #2
11:03 I don't think those goals are controversial.
11:05 I think everybody across the political spectrum
11:08 wants us to get inflation all the way back down to 2% and wants to keep a strong labor market.
11:12 So I think that also provides us a lot of support.
11:15 And then there's built in continuity into the structure of the Fed that Congress designed
11:19 governor serve up to 14 year terms.
11:22 The presidents are independent, the presidents of the 12 reserve banks,
11:25 These structures help us provide continuity.
11:27 I'm confident that between the people who are there,
11:30 our commitment to our dual mandate goals
11:32 and the structures that are in place,
11:34 I'm confident that we will do the right thing and focus on the economy,
11:40 the
11:40 housing market.
11:42 How do you explain what's going on?
11:44 The fact that prices aren't coming down and
11:46 if you keep rates higher than anticipated
11:49 it we've already seen mortgage rates go up since you started cutting.
11:53 Is the housing market dead?
11:55 Well, the, the, the housing market as I've studied it, and this is an issue all around the country, the lack of affordability,
12:02 not just for low income workers, but for middle class families
12:05 and more.
12:06 It's really one that we've underbuilt housing for the last decade following the great financial crisis.
12:10 We just structurally underbuilt housing.
12:12 So there's an essence a shortage.
12:14 And as I think about back to the notion of a neutral interest rate, think about a neutral mortgage rate.
12:19 If we have structurally underbuilt housing
12:21 and there's a lot of demand for housing,
12:23 what
12:24 interest rate is going to clear that market?
12:26 All else being equal, you would think a higher interest rate will clear that market.
12:29 And so
12:30 I think the housing market has its own unique dynamics that are going on that are driving this
12:34 more than just a macroeconomic landscape and more than just monetary policy.
12:38 So the Fed
12:39 raises its hands and says it's not something we can fix.
12:42 Yeah, we can't fix it.
12:43 I mean, if we if we said we're going to cut interest rates
12:46 to try to support housing affordability,
12:48 setting aside the rest of our goals,
12:50 what would that probably do?
12:51 That would probably push up the price of housing.
12:54 And so would that actually improve affordability?
12:55 And so I don't think monetary policy is well suited to
12:59 address the structural issues that are going on in the housing market.
13:02 We've touched on absolutely everything.
13:03 Can we finish on financial markets?
13:05 Sure.
13:05 You know them well.
13:06 Are you worried about cutting into an asset bubble?
13:09 You know,
13:10 when
13:11 I always go back to when Chairman Green, then Chairman Greenspan in 1995 declared a rational exuberance, 1995, he declared it and the stock market went up for the next 4 years.
13:20 I look at that episode and think if the Fed had tried to use monetary policy to address that bubble,
13:25 it would have done more harm to the economy
13:28 then the fairly mild recession that followed when the tech bubble burst.
13:31 And so I just think monetary policy is the wrong tool
13:34 to try to address acid bubbles.
13:36 Do you think there's something that needs to be addressed?
13:38 Well, you know,
13:40 bubbles are
13:41 easy to spot in hindsight.
13:43 If we really are in a higher productivity environment,
13:46 if we're in a higher growth environment
13:48 and corporate earnings are going to continue to climb,
13:51 one might look back and say, hey, these asset prices are not irrational.
13:54 So it's it's hard to judge right now.
13:56 If I knew where productivity was going,
13:58 I'd be able to give you a more definitive answer.
14:00 Just look at the markets right now, equities very close to all time highs.
14:02 We've got credit spreads that are at incredibly tight levels for investment grade tighter than anything we've seen so far this century for high yield.
14:10 I think you've got to go back to
14:11 pre GFC
14:12 and you know what happened next.
14:14 We're cutting interest rates into that.
14:16 We have
14:17 authorities down in Washington, DC as Trump second administration that could be cutting taxes going into that as well.
14:23 What is on your radar with regards to that?
14:25 What would you watch to say actually
14:27 something going on here that maybe we need to pay a little bit more attention to?
14:30 Well, from a financial stability perspective,
14:33 traditionally the biggest
14:34 sources of financial instability
14:36 are leverage and maturity transformation and the intersection of those two.
14:40 That's why banks are inherently risky lever tend to one or more, they take overnight money and then they lend long into it.
14:46 So for example, a lot of people have looked at private credit and said this is a huge growing asset class.
14:51 Isn't this scary?
14:52 As I've looked into it, they seem to be much less levered than banks and they generally have long from funding.
14:58 So on those two primary demand.
15:00 Mention of financial instability, leverage and maturity transformation.
15:03 It doesn't seem to be
15:05 riskier than banks, probably less risky than banks.
15:07 So
15:08 we continue to look for leverage.
15:09 We continue to look for maturity transformation.

Fed's Kashkari on Inflation, Housing, Jobs Market

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