Fed’s Kashkari: 50-Basis-Point Rate Cut Was the ‘Right Decision’ – Reuters

By Ann Saphir and Michael S. Derby

Minneapolis Federal Reserve President Neel Kashkari expressed his support for the recent interest rate cut by the U.S. central bank, describing it as the "right decision" given the progress made on inflation and the potential risk of rising unemployment.

Kashkari remarked that the balance of risks has shifted from concerns about inflation to worries about a weakening labor market, necessitating a lower federal funds rate. He highlighted that even after the cut, the overall monetary policy remains tight.

Last week, the U.S. central bank reduced its policy rate by half a percentage point, bringing it to a range of 4.75%-5.00%, a move that surprised many analysts due to its larger-than-usual size.

Although Kashkari is not one of the 12 voting members of the Fed this year, he previously held a hawkish stance, advocating for a tighter monetary policy to combat inflation. In recent comments, he indicated openness to a rate cut, albeit preferring a smaller adjustment unless labor market conditions deteriorated rapidly.

In an interview after his essay’s publication, Kashkari characterized the half-percentage-point cut as a positive initial step, asserting that interest rates remain economically restrictive even after the adjustment. He noted that he could have supported both a 25 basis point and a 50 basis point cut, but ultimately deferred to the policy-setting committee’s decision for the larger cut.

Looking ahead, Kashkari suggested that there may be less urgency for aggressive rate cuts. When asked about his expectations for quarter-percentage-point cuts at the final two meetings of the year, he indicated that his projections were flexible and would depend on upcoming data.

His recent remarks align him with many of his fellow Fed policymakers, as his analysis suggested the likelihood of another half-percentage-point reduction in the policy rate during the remaining meetings this year. He also projected a total reduction of one percentage point in the policy rate over the next year, aiming for it to reach 3.4%.

Kashkari emphasized that the anticipated path would be data-dependent. He noted that inflation, as measured by the Fed’s preferred gauge, has fallen to 2.5%. While he stated that this does not represent a win in the battle against inflation, it does reflect significant progress.

He remarked on the current disinflationary trends and indicated a shift in risks, now leaning more toward concerns about weaker hiring rather than high inflation. In his essay, Kashkari observed a softening labor market, with the unemployment rate still low at 4.2% but higher than last year, alongside other indicators suggesting a slowdown in labor conditions.

Despite this, he pointed out the surprising resilience of consumer spending and economic growth, describing the mixed data as "confusing" and suggesting that it does not imply the emergence of recessionary pressures.