Fed’s Kashkari Says ‘Cooled’ US Labor Market Not Driving Inflation

Minneapolis Federal Reserve President Neel Kashkari stated that while the U.S. labor market is in "decent shape" and has cooled, it is not the main cause of current inflationary pressures. He emphasized that controlling inflation remains his top priority, as consumer prices are still "much too high" and have remained above the Federal Reserve's 2% target for more than five years. Kashkari reiterated the Fed's commitment to a balanced approach to its dual mandate of price stability and full employment, but stressed that inflation currently demands more attention.

Kashkari warned that prolonged elevated inflation increases the risk of unanchored consumer expectations, which would necessitate more aggressive monetary policy responses. He believes that taking necessary actions now is crucial to keep inflation expectations firmly anchored. The U.S. headline inflation stood at 3.8% in April, with core CPI, excluding food and energy, increasing by 0.4% monthly and 2.8% annually.

He identified several global factors contributing to inflationary pressures, including the Covid-19 pandemic, tariffs, the war in Ukraine, and the conflict in Iran. However, Kashkari specifically attributed the current surge in inflation largely to rising energy and fertilizer prices, noting that these input costs permeate other sectors of the economy. He is closely monitoring how energy prices will impact the broader economy and overall inflation.

Despite the ongoing inflationary risks, Kashkari indicated it is too soon to definitively conclude that interest rates need to be raised immediately. He stated that the central bank should keep all options on the table and carefully observe incoming economic data and the geopolitical situation, particularly the conflict in the Middle East, before making any adjustments to interest rates. He supported the Fed's decision to hold rates steady in April but dissented against dovish guidance suggesting the next move would be a rate cut, advocating for neutral guidance allowing for either a hike or a cut based on data.