Fed: Why I supported cutting rates last week – Neel Kashkari

Minneapolis Federal Reserve Bank (Fed) President Neel Kashkari published an essay on the Minneapolis Fed’s website on Monday, explaining why he supported the central bank’s 50 basis point (bps) interest rate cut last week.

“We have made substantial progress in bringing inflation back toward our 2 percent objective and the labor market has softened, the balance of risks has shifted from higher inflation to the risk of further labor market weakness, justifying a lower federal funds rate,” Kashkari said.

Furthermore, Kashkari added: “The rise in inflation in the first quarter appears to have been a blip, not a lasting trend,” while noting that “over the past six months, the labor market has shown signs of easing from the very tight conditions of recent years.”

He sounded a note of caution, saying that the “economy continues to offer mixed signals about its underlying strength. While a softening labor market suggests weakening economic activity, other economic measures suggest continued strength. For example, GDP and consumer spending continue to show surprising resilience, suggesting still-solid underlying demand.”

Finally, on what lies ahead, Kashkari said: “I have slowly raised my estimate for the longer-run federal funds rate as we have continued to be surprised by the resilience of the economy despite high policy rates, a combination that suggests the neutral rate may have risen at least temporarily. The longer this economic resilience continues, the more of a signal I take that the temporary rise in the neutral rate could in fact be more structural.”

Market reaction

These comments do not seem to be having a significant impact on the valuation of the US Dollar (USD). At the time of writing, the USD index was down on the day, just below the 101.00 level.