MNI BRIEF: Fed Cuts Not On Preset Course, Kashkari Says

The risk of a worsening labor market is higher than that of a surge in inflation, but a higher neutral rate of interest means the Federal Reserve can take its time in reducing interest rates, Minneapolis Fed President Neel Kashkari said Friday. 

"I do not believe we should be on a preset course for a series of rate cuts. If the labor market proves more resilient than it seems at the moment or if inflation surprises to the upside, we should be prepared to pause and hold our policy rate," said Kashkari in an essay. "I even remain open to raising the policy rate further if economic conditions warrant it. Of course, if the labor market weakens more quickly than we currently expect, we could always move more quickly to support economic activity." (See MNI POLICY: Fed Takes Measured Approach To Post-FOMC Cuts)

He said labor market risks are rising and the effect of tariffs on consumer prices is real but thus far not considerable enough to alter the medium-term path of inflation. 

"These concerns suggest to me a risk of inflation persistence—3% or slightly higher inflation for a year or two—rather than a significant jump in the level of inflation to, say, 4 or 5%. Unless there is some large increase in tariff rates from here or some other supply-side shock, it is hard for me to see inflation climbing much higher than 3% given announced tariff rates and the relatively small share of imported goods in overall U.S. consumption," he said.