Neel Kashkari Backed Fed’s Large Cut and Another Half-Point This Year

(Bloomberg) — Federal Reserve Bank of Minneapolis President Neel Kashkari signaled he backs lowering interest rates by another half percentage point by year end in an essay detailing his support for the central bank’s outsize cut last week.

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In the essay, published on the bank’s website Monday, Kashkari noted that inflation had cooled significantly and was close to the Fed’s 2% target. At the same time the labor market is starting to show signs of weakness, he wrote.

“The balance of risks has shifted away from higher inflation and toward the risk of a further weakening of the labor market, warranting a lower federal funds rate,” Kashkari wrote.

His comments follow last week’s decision by Fed policymakers to cut rates by a half-point, an aggressive start to their shift away from fighting inflation and toward bolstering the labor market. The median forecast of Fed officials also released last week was for another 50 basis points of cuts over their two remaining meetings this year.

While not a voter on this year’s Federal Open Market Committee, Kashkari participates in monetary policy deliberations.

On Sept. 20, Fed Governor Christopher Waller said he was moved to support the half-point cut by unexpectedly favorable inflation data in recent weeks.

That contrasted with Governor Michelle Bowman, who said Friday she voted against the decision because she remains concerned about above-target inflation. Bowman became the first Fed governor to dissent against an interest-rate move since 2005.

Kashkari said that while there are uncertainties about the strength of the underlying US economy, growth and consumer spending remain strong. He also said the neutral rate of interest, where Fed policy is neither weighing on nor stimulating the economy, has likely risen.

“The longer this economic resilience continues, the more signal I take that the temporary elevation of the neutral rate might in fact be more structural,” Kashkari wrote.

He forecasts the long-run fed funds rate at around 2.9%, up from the 2.5% he forecast in March. The median estimate among all Fed officials for this rate has similarly increased, to 2.9% at last week’s meeting from 2.5% a year ago.

Kashkari has published a series of essays since 2022, when the Fed began tightening policy aggressively in order to bring down inflation. In his last such piece, written in May, Kashkari said policymakers would likely keep interest rates where they were “for an extended period of time” until they were certain inflation was on track to their target.

Atlanta President Raphael Bostic also said Monday that starting the central bank’s cutting cycle with a large move will help bring interest rates closer to neutral levels as the risks between inflation and employment become more balanced.

(Updates with Bostic comments in 12th paragraph.)