Minneapolis Fed president says U.S. needs to be "open-minded" about interest rates

[0:00] We go now to Neal Kashkari, who is the president and CEO of the Federal Reserve Bank of Minneapolis. [0:05] Good morning. [0:07] Good morning, Margaret. [0:08] So the Federal Reserve kept interest rates unchanged this past week, and on Wednesday, [0:15] you were one of three regional presidents who indicated that future rate cuts may not be [0:20] appropriate and a hike could even be in the cards. You dissented there. [0:25] Are you saying that the financial markets and the White House should no longer expect [0:31] the Fed to cut rates? [0:35] I think we all need to be open-minded about where interest rates are going because there's [0:39] so much uncertainty coming out of the Middle East. I think I'm very focused, and many of [0:43] my colleagues are, what happens in Iran, how long the Strait of Hormuz is closed. And the [0:49] longer it's closed, the higher likely energy prices and fertilizer prices will go, the bigger [0:54] impact it's going to have on inflation here in America. And then we at the Fed have to [0:59] take that on board. [1:00] And so I was simply saying that there's so much uncertainty about the outlook in the Middle [1:04] East right now, I don't feel comfortable signaling that a rate cut is in the cards. [1:09] You know, we might, in worse scenarios, we might have to go the other direction. [1:14] I know you were just listening to Kevin Hassett, the president's economic advisor. [1:19] He was not directly answering the question of what comes next, but he was painting a picture [1:25] of continued tension. And I wonder now, since we're in week 10 of this tension, however it's [1:33] defined, how are you going to be able to judge the inflation shock over the next few weeks [1:39] until you get to that June meeting? [1:41] Well, I'll give you an example. So the price effect, the energy effect and energy prices [1:47] from the Iran conflict is already by some measures as big or larger than when Russia invaded Ukraine. [1:54] So it's already having a big effect and we're seeing it. You mentioned the PCE data. We're [1:58] already seeing it in the inflation numbers here at home. I talked to the CEO of a global company [2:03] headquartered in Minnesota that has supply chains all around the world just last week. [2:07] And they have estimated that even if the strait reopened today, it would probably take six [2:13] months for their supply chains to return to something like normal. So I think for the [2:18] Fed, we are going to have to watch what happens in the Middle East and the inflation data very [2:22] carefully. That's going to have to guide us. But if it's a six month process for inflation [2:28] returning to normal or something like normal, in the best case scenario, I'm also very concerned [2:33] about something that's not the best case scenario and what that might do to prices here. [2:37] So we'll hear from Chevron's CEO later in the program. He also talks about just the many, [2:44] many factors that are likely to keep energy prices elevated for some time. [2:48] In your letter that you published explaining why you dissented, you also said the labor [2:56] market has been in a, quote, low hire, low fire environment for some time. Right now, we're seeing [3:02] some corporate layoffs underway. And I wonder what the dynamic is that you think is playing out now [3:08] and how the energy shock is going to play into it. Well, so far, recently, the labor market has shown [3:15] some signs of stabilization. So if you look at unemployment claims and new unemployment claims, [3:20] they're very low. The unemployment rate has been at around 4.3 percent. It's bounced around a little [3:25] bit for the last six months. So it seems like mostly the labor market is moving sideways. But the bigger [3:31] the inflation shock that comes out of the Middle East, the more that's going to force Americans to cut [3:36] back in their spending, because they have to pay for gas, for example. So they'll cut back other [3:41] spending. That can have a way of tamping down economic growth. That even could translate into [3:47] some weakness in the labor market. So at this moment, the labor market seems like it's OK. But [3:52] if this conflict is prolonged or if it gets much worse from here, then I think that could be a real [3:57] downward shift to the growth trajectory of the U.S. economy. And it will be uneven on who gets affected by [4:03] that, unfortunately. When you say prolonged, what do you mean by that? We're in week 10. [4:08] Well, I mean, could it go on for months? Could it go on for the end of the year? I just don't know. [4:15] I'm not a foreign policy expert, but we're watching very carefully. And that, you know, [4:19] the challenge the Fed is facing right now is really about uncertainty of the outlook for inflation, [4:24] which stems back to what happens in the Middle East. And it seems like there's a great deal of [4:28] uncertainty about the path ahead, from what I can read. I want to ask you about what's happening [4:34] with the Fed as an institution. The Senate Banking Committee voted to advance Kevin Warsh's [4:39] nomination as Federal Reserve chair. He is expected to be confirmed in mid-May. During his testimony, [4:46] he said the Fed has mishandled inflation over the past few years. And he said the Fed needs a, quote, [4:52] serious shaking up with a good family fight. Do you agree with that? There needs to be a good family fight [4:59] and a change of how you do business? [5:01] Well, I think we're all looking forward to Kevin concluding his confirmation process. [5:07] We look forward to working with him and hearing his ideas. Some of the things that he's talked [5:11] about, I think we are, would welcome an examination of, how we communicate, this thing that we call [5:17] the dot plot, he's talked about. I think many of us would like to examine that. There are things [5:23] about the balance sheet and how we use the balance sheet. I think those are also, I think we would [5:28] welcome a fresh examination of some of these policies. And so I think someone coming in and saying, [5:32] hey, let's re-examine how we use some of our tools, I think those are good discussions to have. [5:37] I don't think we'd be physically fighting. I think that we'd have robust discussions over [5:42] the benefits and the cost of these various tools. And I think that that would be worthwhile to have. [5:47] Or how you measure inflation? [5:49] Well, I think that there are many different ways of measuring inflation. He has talked about in his [5:55] confirmation hearing some of his preferred measures. We are always looking at different ways [5:59] of measuring inflation. And in different moments, certain measures seem like they do a better job [6:04] than others. And so I think we need to examine all of those options dispassionately and figure out [6:09] what is the best measurement tool going forward. [6:11] Quickly, the national debt is now larger than the U.S. economy. It exceeds 100% of GDP. It's going [6:19] towards a record here. What risk does that pose? [6:22] Well, no one knows how big is the danger zone and when it's going to actually trigger some kind [6:29] of a crisis. If you look, I know you know this, if you look at the CBO's forecast for where the debt [6:34] is going, it's absolutely headed to an unsustainable level. Ultimately, this is the job of our fiscal [6:39] policymakers, Congress and the executive branch to come together and put us on a sound fiscal [6:45] trajectory, which we're not on right now. I don't see an immediate crisis brewing, but at some point, [6:50] it's going to be a problem. And ultimately, our political system needs to address it. [6:54] Neal Kashkari, thank you for sharing your insight this morning.