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News, GRAMMT inflation data out just moments ago, in line with expectations, CPI month over month coming in at zero point two, stripping out food and energy that came in at zero point three as expected. The media estimate in our survey was zero point three. The equy price sanction off the back of it on the S and P
up by two tenths of one percent. On the NASSNE one hundred up by a tenth of one percent, the outperformance on a russor of small caps up by eight tenths of one percent, as you'd expect with this move in the bond market, on a two year tenure and thirty year yields lower across the board, the two year down by eight basis points, the ten year down by about five basis points. On a thirty year with down by about three. If you check out foreign exchange switch on the board and get to FX, we can look
at whether the euro is right now. We are training just a little bit more positive off the back of that data one oh six forty three, and police to say that responding to this economic data now is the Minneapolis Fed President Neil Kashgari President, Kashgary, good morning.
Going to see you again. Good morning, good to see you.
Right to cant sho Up. I saw some comments from yesterday and for our audience that might have missed them, I'll share them with our audience now we can pick up on them. That have to be a surprise on the inflation front to change the outlook so dramatically. If we saw inflation surprises to the upside between now and then, that might give us pause for December. It'd be hard to imagine the labor market really heats up between now
and December. That's just not that much time. Inflation dates around just moments ago, and I think in that to disrupt this easing bias that seems to have gripped the FED over the last few months.
Well, first of all, it's very fresh data, so I haven't had time to go through it in a lot of detail, but at least on the headline level, it seems to be confirming the path that we're on. We've made a lot of progress in the last year or so bringing inflation down. I need to go through the component of that release, which I have not done yet, but generally speaking, goods inflation is back down to where we want it to be where it was pre pandemic.
Services inflation, which is tied to wages, is gently trending down. And then finally, housing inflation, we know is a lagon the indicator. We know that it takes a couple of years for the new least is to turn over. New leases are showing that we're heading in the right direction. So right now I think that inflation is head in the right direction. I've got confidence about that.
But we need to wait.
We've got another month or six weeks of data to analyze before we make any decisions.
One of the things that has been very noticeable over the last week is the change in investors' views about where you're.
Going to end up.
If you're looking at SO for futures right now, the only price in about seventy five basis point cuts between
now and the end of twenty twenty five. Are we entering a period because we don't know what Donald Trump's policies are actually going to be where the dot plot the summary of economic projections are kind of off the table, can't really put a lot of faith in them, and that maybe you're in the lail brainer attenuation phase where you slow down everything and people should expect not a lot of guidance from the Fed.
Well, you know, the dot plot is something that I at times I'm glad we have it, and in times it's more of a frustrat that we have to fill it out.
Because there's so much uncertainty about the economic outlook. Over the past year or.
Two, I've been surprised at the resilience of the US economy in the face of seemingly quite high policy rates. Yet the labor market has stayed strong and the economic growth continues to surprise us. So for me, I've been asking questions about where's the neutral rate for the.
Last year or two. That's not about the election.
That's just about how the economy has been performing over the past year or two. And so you know, for example, there's been revisions that suggests that productivity is now higher than it had been in prior years. If that higher productivity environment is maintained, that would tell me we're probably in a somewhat higher neutral rate environment. Again, that's not about the election. That's just about how the economy has
actually been performing. And so for me as a policymaker, that's what's leading to my own uncertainty about where's our ultimate destination. And I think that people are raising questions about what is the new administration going to do, what is the new Congress going to do? I think that's also adding uncertainty about ultimately what's the growth trajectory of the US economy.
Well, Tom Barkin said yesterday your colleague from the Richmond Fed that right now, there's no way to know, so one has to just kind of assume that things are going to be maybe stuck inflation stuck above two percent.
Would you join in that sentiment.
I'm not sure that I'm ready to say that inflation is stuck above two percent. I think it's right now running in the mid twes on a PCE basis. And as I said earlier, goods inflation is backed down. Services inflation is tied to wages, and wages are gently trending down. And housing inflation, we know, is going to take a couple of years before completely before the new leases roll all the way through the housing inflation. So I have confidence that inflation is headed in the right direction.
Is it headed there fast enough? Do we want it to get there more quickly? You know?
We will see, but ultimately that and the labor market are going to guide our policy decisions.
Well. Back in September, on the labor market, you said that the balance of risks had shifted towards a more weakening labor market. Do you think we've backed off that risk? Not as acute as it was since we've had the data since September.
Yeah, we had seen some data piling up up until that September meeting which was pretty much pointed in one direction, which was a softening labor market. We then had a surprise and the other way. The labor market looks stronger, but then a reversal in the subsequent job report, and so I still think the labor market is softening. A four point one percent unemployment rate is a good unemployment rate. It's a good labor market. It's not as tight as it was a year ago or two years ago.
So it's unquestioned that it has been softening.
And right now we're in a good place in the labor market and we want to keep it there. You know, I do a lot of outreach to businesses large and small around my region, as well as labor unions around my region. Generally, what I hear is costious optimism. People feel good about the outlook, but there are some trends that it's slowly softening, and we just want to watch that carefully.
Know the election, We've got to talk about the election. And I know it's a difficult moment for the Federal Reserve. I think it's a difficult moment for munating policy makers worldwide for that matter. The chairman down with it in the news conference.
It's pretty clear.
We don't speculate, we can't make assumptions. But you're at the risk management business, and you've been in the risk management business for a long time. It predates your experience at the Federal Reserve. Do you think we've introduced two way risk in twenty twenty five, and when you think about the bounce of risk, does that call for slow approach to any movement monetary policy one way or the other?
Well, two way risk, I think we've already had two way risks.
So we've got risks of the labor market continuing to soften and over softening, and then we've got risks of inflation potentially getting stuck. I'm not seeing a lot of upside risks yet, we don't know what's going to get it acted. I'm not seeing a lot of upside risk that inflation is going to take off from here. The bigger risk that I'd be concerned about in the inflation front is just if we're landing it around a two and a half percent level instead of back down to
two percent level. I think that those risks existed before the election, and I think that there continues to be uncertainty now and we need to just be take our time, let the data come to us, and let that guide us. Ultimately, for me, this goes back to the discussion we had
a moment ago about where's the neutral rate. There's this uncertainty in my mind about where the neutral rate is, and the longer the economy continues to exceed expectations, the more signal I take that we must not be as restrictive as I would have assumed.
FED staff analyzed though, during the first iteration of Trump, the impact of the tariffs, and everyone coalesce around this idea that there is a one off increase in inflation. You can look through it. It wasn't going to be this vicious cycle and ongoing inflation threat. Did you agree with that assessment at the time, and do you still think that that's what tariffs could do.
In terms of inflation. I agree with that assessment at the time.
I still agree with that, but I think your prior guest touched on it, which is it really depends on what the other countries end up doing. If there ends up being a tip for tat and one country raises tariffs, they respond and you go.
Back and forth.
In definitely that could lead to a longer term imprint on inflation and potentially inflation expectations. And of course we don't know what our own tariffs are going to be, let alone what other countries are going to respond with, and so we just need to be patient.
And see I had a note come in from one of the Wall Street analysts that had a line that I thought was really valid, and that is that if you're going to forecast inflation, you have to have a theory of inflation and what's causing inflation. We've got relatively strong labor markets right now, and we've got concern about inflation. Real interest rates just keep rising and they're working in
opposition to your rate cuts. What's your theory of inflation and how come we're seeing this kind of real rate reaction.
Well, I've done a lot of soul searching on why I missed the inflation run up in the first place. I was surprised on the run up. I was also surprised on the disinflation that followed it. And the one thing that's been constant is it was not the labor market.
On the run up or the disinflation.
It was mostly supply factors, and so supply chains got gummed up that took a lot longer to resolve.
The inflation took off.
You the war in Ukraine also pushing inflation up, and then many of those factors unwound or didn't get worse, bringing inflation back down. So monetary policies role, in my judgment in this episode has been to keep in long run inflation expectations anchored, and it has provided some gentle cooling to the labor market. I don't think the supply factors are what have caused the labor market to gently cool.
I do think monetary policy has been doing that. And so you put all that together, it says that when I thought we were applying two feet on the brakes of the economy with monetary policy, we might only have been applying one foot on the brake, and so this goes back to where ultimately are we going to settle. We're going to have to let the economy guide us.
We are now paying as much attention to CPI again as we are to the labor market. But the labor market comes up in early December. We had a really really strong September and a really really weak October. You where is the labor market as far as you're concerned, I think.
The labor market is in a good place right now. Again, the anecdotes that I get, I look at the data, the official statistics, which always have uncertainty. There's even more uncertainty about the labor market statistics, not just because of the hurricane and the Boeing strike, but because of the large immigration flows, which are we're not exactly sure how big they are and their time varying. So what is this month's break even level of job growth? You know,
your guest is as good as mine. So I look at the official statistics, and then I marry it to what we're all here in my colleagues and I from all of our contacts around the country. The labor market right now is strong it's a healthy labor market. Jobs are available, businesses are feeling good. We want to keep it that way, and.
So as we get the data in, I'm going to continue to do.
My own outreach, and all of the other presidents are going to do their outreach to the businesses large and small, and labor groups to get a sense of is the labor market cooling slowly, is it heating up, or is it cooling quickly? And that will those will be important judgments into our policy deliberations.
Your former colleague Bill Dudley wrote a Bloomberg opinion piece earlier this week basically saying that there's this possibility that Trump enacts policy quickly and forced lye in a way that doesn't give the Fed enough time to respond and without the proper tools to respect. Is that a concern you also share.
I think fiscal policy is always an input into our deliberations and into our analysis and assessment of the economy. I don't think that's new now, And it's not just US fiscal policy. It's what happens with other countries, what happens with our trading partners, and so that type of uncertainty we're used to dealing with it. Obviously, we would
like to have less uncertainty. That'd be great, but it's the world that we live in, and we will take all the information we can as we get it and incorporate it into our thinking.
Speaking of uncertainty, there's been a lot of concern about what Trump two point zer would mean in tern of job voting the FED and how he felt about j.
Powell.
The FOMC had this plan during the first iteration of Trump that maybe they even move Powell to chair of the FOMC if he was going to take over the chairmanship of the actual FED. Would you basically all act as a group to potentially thwart anything that was coming at you that would negate the FED independence.
We are all.
Committed to our dual mandate goals, everybody around the table, all of my colleagues, stable prices and maximum deployment. So number one, we're all committed to those goals. Number two, I don't think those goals are controversial. I think everybody across the political spectrum wants us to get inflation all the way back down to two percent and wants to keep a strong labor market. So I think that also
provides us a lot of support. And then there's built in continuity into the structure of the FED that Congress designed governors serve up to fourteen year terms. The presidents are independent, the presidents of the twelve reserve banks. These structures help us provide continuity. I'm confident that between the people who are there are commitment to our dual mandate goals and the structures that are in place, I'm confident that we will do the right thing and focus on the economy.
The housing market. How do you explain what's going on the fact that prices aren't coming down and if you keep rates higher than anticipated, We've already seen mortgage rates go up since you started cutting the housing market dead well, the.
Housing market as I've studied it, and this is a you all around the country, the lack of affordability not just for low income workers, but for middle class families and more. It's really one that we've underbuilt housing for the last decade following the Great Financial Crisis. We just structurally underbuild housing. So there's a sense a shortage. And as I think about back to the notion of a
neutral interest rate, think about a neutral mortgage rate. If we have structurally underbuilt housing, and there's a lot of demand for housing. What interest rate is going to clear that market? All else being equal, you would think a higher.
Interest rate will clear that market.
And so I think the housing market has its own unique dynamics that are going on that are driving these more than just a macroeconomic landscape and more than just monetary policy.
So the FED raises its hands and says, it's not something we can fix.
Yeah, we can't fix it.
I mean if we said we're going to cut interest rates to try to support housing affordability, setting aside the rest of our goals, what would that probably do? That would probably push up the price of housing, and so would that actually improve affordability? And so I don't think monetary policy is well suited to address the structural issues that are going on in the housing market.
We've touched on absolutely everything. Can we finish on financial markets?
Sure?
You know them?
Well?
Are you worried about coming into an asset bubble?
You know?
I always go back to when chair then Chairman Green spent in nineteen ninety five declared irrational and xuberant. So nineteen ninety five you declared it, and the stock market went out for the next four years. I look at that episode and think if the FED had tried to use monetary policy to address that bubble, it would have done more harm to the economy than the fairly mild
recession that followed when the tech bubble burst. And so I just think monetary policy is the wrong tool to try to address asset bubbles.
Do you think there's something that needs to be addressed.
Well, you know, bubbles are easy to spot in hindsight. If we really are in a higher productivity environment, if we're in a higher growth environment and corporate earnings are going to continue to climb, one might look back and say, hey, these asset prices are not irrational. So it's hard to judge right now if I knew where productivity was going to be able to give you a more definitive answer.
Just look at the markets right now. Equity is very close to old time highs. We've got credit spreads that are at incredibly tight levels for investment grade, tight to than anything we've seen so far this century. For high yield, I think you've got to go back to PREGFC and you know what happened next. We kind of interest rates into that we have authorities down in Washington, d C. It's some second administration that could be cutting taxes going
into that as well. What is on your rate down with regards to that, What would you watch to say, actually something coming on here that maybe we need to pay a little bit more attention to well.
From a financial stability perspective, traditionally, the biggest sources of financial instability are leverage and maturity transformation, and the intersection of those two.
That's why banks are inherently risky. Leverage tend to want or more.
They take overnight money and then they lend long into it.
So, for example, a.
Lot of people have looked at private credit and said, this is a huge growing asset class.
Isn't as scary as I've looked into it.
They seem to be much less levered than banks, and they generally have longer term funding. On those two primary dimension of financial instability, leverage and maturity transformation, it doesn't seem to be riskier than banks, probably less risky than banks. So we continue to look for leverage, we continue to look for maturity transformation.
No smile as always, good to see you, Good to see you, Thanks for tim Thank you sir, Neil Kashcaneri there the Minneapolis Fed president