Amid the persistent high-interest-rate environment, the U.S. economy has demonstrated resilience exceeding expectations, presenting the Federal Reserve with more complex trade-offs regarding the timing and magnitude of interest rate cuts this year. Neel Kashkari, President of the Minneapolis Federal Reserve Bank, stated at a virtual town hall hosted by the Wisconsin Bankers Association on Wednesday that the U.S. economy continues to operate robustly under high interest rates; while inflation is receding, it remains significantly above the Fed's 2% target. Concurrently, the labor market is cooling but has not yet shown clear signs of significant stress.
Kashkari remarked, "The resilience of the economy has surprised me to the upside." He pointed out that consumer spending remains stable, and investment related to artificial intelligence, including data centers and energy infrastructure, remains very strong. "That makes me question just how restrictive policy really is at this point," he added. As a voting member of the Federal Open Market Committee (FOMC) this year, Kashkari emphasized that the Fed must proceed cautiously and avoid cutting rates too early or too aggressively until inflation is clearly on a sustainable path back to target.
Although job growth is slowing and hiring is weakening, the scale of layoffs remains limited, with the unemployment rate hovering around 4.4%. He indicated that policymakers are navigating a "narrow path," warning that premature easing to support employment could prolong the inflation problem, thereby damaging the central bank's credibility. "If we cut rates and that actually makes the inflation problem worse, is that really helping families?" Kashkari noted that inflation remains the primary reason many families feel economic pressure.
Regarding the composition of inflation, Kashkari expressed the most confidence in the continued moderation of housing-related inflation, believing that slowing rent growth will gradually be reflected in official data. However, he was more cautious about the decline in goods inflation and non-housing services inflation; the latter is closely linked to wage growth and may take longer to cool down. He also warned that price pressures related to tariffs might take longer than expected to fully feed through the economy.
On Wednesday, several Fed officials made public remarks. Philadelphia Fed President Patrick Harker stated that if inflation continues to cool and the labor market stabilizes, she is open to further rate cuts later in 2026. Fed Governor Christopher Waller emphasized that deregulation policies could help reduce inflationary pressures, thereby creating room for more accommodative monetary policy. In contrast, Kashkari's stance appeared more cautious. He believes the decline in inflation so far is still insufficient to support an "aggressive" easing cycle, and future policy will depend on whether inflation continues to weaken in the coming months.
Kashkari also addressed the issue of central bank independence. As the U.S. Department of Justice launches an investigation into an office renovation project involving Fed Chair Jerome Powell, and as former President Trump prepares to announce a new nominee for the chair position, external scrutiny of the Fed's independence has intensified. Kashkari stressed that monetary policy decisions must be insulated from political pressure, stating, "Whoever the next chair is, they get one vote. The most persuasive argument wins."
Atlanta Fed President Raphael Bostic said on the same day that the labor market "has softened, but I wouldn't call it weak." Given strong demand and record corporate profits, he argued the Fed still needs to maintain a "restrictive stance" to push inflation closer to the 2% target. He also praised Chair Powell for remaining focused on the central bank's mission, emphasizing the importance of maintaining resolve under external pressure.
Conversely, Governor Waller, in prepared remarks for an economic forum in Greece, suggested that the Trump administration's deregulation efforts could cut business rules by up to 30% over several years and reduce inflation by about 0.5 percentage points annually. He argued that if the Fed fails to account for improvements in supply and productivity in a timely manner, financial conditions could become "unnecessarily tight," potentially leading to unnecessary risks of deflation and economic contraction.
The Fed cut its policy rate by 25 basis points last month to a range of 3.50% to 3.75%. However, markets widely expect the federal funds rate to remain unchanged at the January 27-28 meeting. With the interplay of multiple factors including inflation, employment, and policy independence, the path for Fed rate cuts remains fraught with uncertainty.
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