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Minneapolis Fed President Neel Kashkari speaks with Yahoo Finance [Transcript]

·Reporter
·17 min read

Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, joined Yahoo Finance to discuss the central bank's efforts to pull its pandemic-era stimulus.

Below is a transcript of his appearance, aired live on Jan. 28.

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BRIAN CHEUNG: Thanks so much, Brian, obviously a lot of the heightened attention to that economic data because of what the Federal Reserve's policy response is going to be. And luckily, we have one of those policymakers here joining us live on Yahoo Finance right now. Minneapolis Fed President Neel Kashkari. Morning.

NEEL KASHKARI: Morning. Great to have you here at the Minneapolis Fed.

BRIAN CHEUNG: Yeah, it's great to be here in person. We were planning on doing this outside originally, but you know, negative 5-degree temperatures. Brought it inside, we couldn't hang. But obviously a lot of important topics to still talk about. The first being, of course, inflation, we did just get an updated read this morning on personal consumption expenditures coming in 5.8% year over year on a headline basis, just your initial thoughts on inflation.

NEEL KASHKARI: Inflation is higher than I expected, and it's the high inflation has lasted longer than I expected. We know the US economy is recovering from the COVID shutdown and the downturn. But the recovery is uneven, and demand has recovered more quickly than supply has. So given those facts, it's not that surprising that inflation is coming up higher than we expected. But it should start to normalize over the course of this year, if a couple things happen: if workers come back into the job market. We're still missing 3 or 4 million workers. And if supply chains start to sort themselves out, which I hope that they will. But obviously the Federal Reserve has an important role to play and we're going to do our part.

BRIAN CHEUNG: So on the inflationary figures, what's interesting is that the policy move towards possibly tightening later this year, is one effort in getting those inflationary numbers back down. Do you have a forecast for when you would expect to see some of these headline figures start to come down? Is it going to be in the later parts of the spring, summer, later this year?

NEEL KASHKARI: You know, I really focus on the 12-month numbers. So it takes 12 months for these high inflation readings to roll off. I would expect, hopefully by mid year, we'll see some indication that supply chains are starting to unwind. And that we're starting to see some of these high prints of inflation start to roll off. We're not going to be back to 2% by mid year. I certainly still expect inflation to be high. But hopefully it's not going to continue climbing and we'll show some evidence that it's trending down.

BRIAN CHEUNG: So on Fed policy, then in that case, the messaging from the FOMC in the middle of this week, was that the time would come “soon” to start raising interest rates. Is that the mid March meeting for you?

NEEL KASHKARI: That's my expectation. I mean, barring something unforeseen in the economy, my expectation is that the committee will likely move in the March meeting. And then where we go from there, we have to see based on the data, I mean, I've said that I'm comfortable raising interest rates a few times. I penciled in two rate interest rate increases in my December submission to the summary of economic projections. But we need to see how the economy evolves. I mean, if supply chains sort themselves out, if the labor market recovers, more and more workers come back in, and we also have this big fiscal impulse from the US government stimulus that's also unwinding, all of those factors should help bring inflation back down, even before the Federal Reserve acts.

BRIAN CHEUNG: So when we talk about your outlook on inflation, a lot has even changed between the December meeting and the meeting this week. So from that point in time, do you feel like you would like to move even faster than you had projected in December, knowing the inflation numbers that we had gotten since those meetings?

NEEL KASHKARI: Well, one of the key things ways that monetary policy works is expectations about the future. And so the Federal Reserve, actually just in our messaging, even though we have not tightened policy yet, just in our messaging, we've already had an effect on the economy. Already had an effect on expectations. So part of it, in my view, is we need to follow through to demonstrate, hey, we meant it. These weren't just words, we're actually going to walk the walk now. And that's why I see there's some value in adjusting interest rates in the near future. But then we also need to see what happens with these other factors. Is it conceivable we could move in the spring, and then pause, and see how the economy evolves? That's conceivable to me. I don't want to prejudge it right now. That's why I think taking some action soon has several benefits.

BRIAN CHEUNG: So I guess — the word “nimble” was used many times in [Fed Chairman Jerome] Powell’s press conference, how would you describe the path that you want to go down? Because another word that was thrown out there was “steadily.” And you have a lot of Fed watchers, because they love to obsess over individual words, trying to figure out what's the difference between “steadily” and “gradual?” How would you describe what you want to do as you start to normalize policy. Because directionally, that seems like that's where things are going over the course of this year?

NEEL KASHKARI: Well, we have two tools that we are, in a sense, in play right now. One tool, of course, is the expectations for the federal funds rate. The other tool is, of course, the balance sheet, which we've signaled we're going to stop purchasing, stop growing the balance sheet in March, and then probably hold there for some time. And then at some point, start to let that roll off. And the timing of those elements and the gaps between them, that's going to be a point of deliberation for the committee. And so I don't think at this point, it would be appropriate to use one of those loaded words of “gradual” or “deliberate” because that would signal too much confidence about what's going to happen over the course of the year. There are some big outlying factors that are outside of our control. What happens to supply chains, what happens to COVID geopolitical risks? How fast do workers, the three or 4 million workers that are still missing — how fast and how many of them come back in? We have to get signals on all of those accounts before we can determine what we're going to do beyond just a few months from now.

BRIAN CHEUNG: I want to get to the labor market in a second. But what's interesting about inflation is I guess there's also the risk of the other side of the coin, that maybe as policymakers revise up their expectations for inflation could go, maybe inflationary numbers actually come in a little bit lower than that later in the year. What would that mean, in terms of implications for monetary policy, if inflation were to come down faster than you expect?

NEEL KASHKARI: Well, that'd be, that'd be good news, that means we would have to do less to try to bring inflation back into check, we have a very, we have a strong labor market, we want to keep it strong, we want to keep drawing workers back in because that's good for the economy. And it's good for those workers and their communities. And so that's what I'm sensitive to, which is yes, we absolutely need to keep inflation expectations anchored. Let's do that. But while keeping a vibrant job market, so we're not slamming on the brakes. And nobody wants to slam on the brakes. One thing I'm also paying attention to is the yield curve. The Fed has a lot of influence on the front end of the yield curve, we have much less influence on the long end of the yield curve. And the long end of the yield curve is indicating, hey, we're probably headed to a more modest growth environment in the future. We're probably headed into a more modest inflation regime in the future. Remember, prior to the pandemic, for 20 years, advanced economy central banks were struggling with low inflation, modest economic growth. That was driven by structural factors outside of central banks control like demographics. Those factors are still there. So in my mind, there's this giant tractor beam of demographics, you know, demographics is destiny, some people say, that's going to draw us back down to that regime. If that's where we're headed, then we probably don't need to react too hard right now, because those gravitational forces are going to keep pulling.

BRIAN CHEUNG: And that's one big reason why the framework kind of allowed for the Fed to pay attention to prioritizing the shortfalls of maximum employment from where they are now. On the labor market. Is there a concern that as you start to normalize policy that you could possibly increase unemployment?

NEEL KASHKARI: I mean, that's certainly a concern that I would have. And that's why I pay attention to the yield curve, not so much in terms of, hey, can it predict recessions or not — an inverted yield curve. But I think the yield curve gives us feedback on where we are relative to neutral. So is it possible that we could need to move into a net contractionary stance? It's possible that economic conditions would warrant that. But I would want to do that with my eyes wide open — this is a conscious decision that we are making. Because the dual mandate demands it. I don't want to do that — mistakenly moving into a contractionary stance. So that's why the fact that the yield curve has flattened a lot over the past six months, that's giving me some indication that we're probably not that far away from neutral, not as far away as maybe we thought.

BRIAN CHEUNG: But at the same time, how high do you want to hang your hat on neutral? Because it's an invisible target, almost, if you will. And especially if that's going to be the guiding star for where you're driving policy and trying to figure out, are you too tight or too loose? Maybe it's not good to use an invisible target like that?

NEEL KASHKARI: Well, I mean, we have a lot of invisible targets, unfortunately, right? We have what is maximum employment, we kept thinking in 2016, 2017, 2018, hey, we're at maximum employment. Businesses were saying they can't find workers. And yet workers are coming off the sidelines or not retiring. And so we have to make policy with the best information that we have, use our best analysis to make the best estimates we can. And what does maximum employment, what does that mean? That's a hard thing to figure out. But we work diligently at it. Where are we relative to neutral is another really key variable that we have to do our best to try to understand.

BRIAN CHEUNG: And going back to the labor market, we know that there has been a disparate impact on certain types of communities. The African American unemployment rate, for example, actually, you know, ticking up between, I think it was November and December. Are you worried about those groups being further left behind as the Fed starts to tighten policy?

NEEL KASHKARI: Absolutely. I mean, if you look at one thing over the last 30 years or so, labor share of income has declined. And the balance between where the power in the economy lies between workers — in between the owners of businesses — has swung solidly towards businesses. And it's usually at the end of an expansion or the last year or two of an expansion, that some of the left behind groups finally start to participate, to finally start to catch up a little bit. And so we saw that in 2018, 2019, beginning of 2020. They were doing better. So we’ve got to give them a chance, right? We don't want to slam on the brakes on the economy, because the costs of that are going to fall on those communities that can least afford to bear them.

BRIAN CHEUNG: So let's talk a little bit more about the balance sheet run-off. The plan — which is not happening right now, because the Fed is still adding assets that's going to end in mid-March as you mentioned — at some point after you start raising rates, you'll start to maybe allow the balance sheet to shrink. Do you have a preference for the speed at which you'd like to do that when you'd like that process to begin?

NEEL KASHKARI: I don't have a strong view. Again, I think it's going to depend on economic conditions. And my colleagues and I are going to have an active deliberation about it. I don't think we necessarily need to wait as long as we waited in the prior expansion of the prior recovery — between the steps between these various policy tools. We also know that there's a lot of short-term assets on the Fed's balance sheet that will roll off very, very quickly. And so the balance sheet on its own, if we just say, let it roll off, we’ll start to shrink quite dramatically. We'll have to have a conversation about whether we want to moderate that somewhat. But I think that these are all — because we have the experience of the last time, I think we have a lot more confidence in how to do this this time.

BRIAN CHEUNG: Are you gleaning anything from the bond market movement — and I know it's hard to pin anything to one specific action — but gleaning anything from the bond market on the confidence in the ability of the Fed to do that? Because what is interesting is when you look at the last experience, the taper tantrum obviously. Indeed, the yield curve has flattened, but are you getting anything from where bond markets are at with regards to how the Fed might go about that process?

NEEL KASHKARI: Well, I think that that we have erred through — Chairman Powell has led us on this — erring on the side of communicating, erring on the side of being transparent, giving as much information as possible upfront to try to avoid these kinds of unforeseen surprises and unforeseen shocks. And that's so far been effective. I mean, knock on wood, there's still many, many steps yet to go. But so far, so good. But I do think the bond market is giving us feedback about — I think investors have confidence that we are serious about our dual mandate, we're serious about keeping inflation in check. That's why long run inflation expectations continue to be anchored. We now need to walk the walk to say, yes, we met what we said, we are going to achieve our dual mandate. And we're going to trade off these tensions in an appropriate manner.

BRIAN CHEUNG: So obviously need to talk about the issue which is still prevailing, which is the virus itself, the Omicron variant. How do you expect that to weigh on the economic data through what could be a very pivotal time for the Fed looking at the data and saying we're going to change our policy reaction to that? How do you see the virus still affecting those?

NEEL KASHKARI: I think it has a lot of effect. One effect is, we thought, when I thought when enhanced unemployment benefits expired, when schools largely reopened in the fall, I thought you'd see a bigger surge of workers coming back in. you had the Delta wave, then you're the Omicron wave. So I think fear of the virus is still keeping people on the sidelines. So that's a big factor that I'm going to be watching. A second one is a lot of concern out there about what's happening in Asia, especially China's response to Omicron, they still have a zero COVID policy. They're still shutting down communities if they have a minor outbreak relative to what we have here. That could affect U.S. supply chains that could affect the global economy as well. So the virus in Asia is also going to be a very important factor in unraveling some of these gummed up supply chains. So those are two areas where I think Omicron and then of course, are there more variants to come? I hope not. But we just never know.

BRIAN CHEUNG: From the Q4 data — I know the Omicron surge was kind of towards the tail end of that — did that tell you anything? Because the Q4 number was a very big increase compared to Q3. But at the same time, I saw there was a restaurant down the block here in downtown Minneapolis — they only just reopened this week because of all the issues that they had with their staff getting the virus.

NEEL KASHKARI: Yeah, I mean, that's another factor, which is just worker, temporary worker shortages, just because you have outbreaks in different businesses, and so people have to isolate. So all of these factors. It's a very muddy economic picture right now. You saw retail sales were less than people had expected in December. So that's a negative. But then you had the overall very high GDP print. I think we had a somewhat more modest labor supply response than I had expected. So it's just a noisy economic environment right now.

BRIAN CHEUNG: And then last question here. Obviously, the Fed ethics have been in view by a lot of the public, maybe people who don't even dial that closely into monetary policy. You've had a few of your colleagues that exited the central Bank, because of some of the disclosures that they had. When you engage with people in the community, is that a question that you face? Do you feel like there's any challenge to credibility as a result of some of the trading that was done by some of your colleagues?

NEEL KASHKARI: I have been asked about it, and we should be asked about it. This is unacceptable, what took place. And I was shocked when I saw the news stories that had broken, I just assumed nobody was trading, because I don't think anybody should be trading. And so we are going to be putting in place very strong new rules, very soon, that I think will make sure that this never happens again. And we are all committed to returning the public's trust because there was damage caused by this.

BRIAN CHEUNG: How much damage do you think?

NEEL KASHKARI: I mean, hard to know. I mean, I think we are all totally focused on our public service mission and committed to that, and I think that we will earn back the trust but I think it's going to take some time.

BRIAN CHEUNG: All right, Minneapolis Fed President Neel Kashkari here live on Yahoo Finance, thanks so much for stopping by. Hopefully next time we'll do it a little bit warmer and do it outside.