Fed’s Kashkari sees two more 2025 cuts given hiring slowdown

Minneapolis Fed President Neel Kashkari

Federal Reserve Bank of Minneapolis President Neel Kashkari said he supported the US central bank’s decision to lower interest rates this week and penciled in two additional cuts this year.

“I believe the risk of a sharp increase in unemployment warrants the committee taking some action to support the labor market,” Kashkari said Friday in an essay published on his bank’s website.

Fed officials lowered interest rates by a quarter percentage point — the first cut since December — at their policy meeting Wednesday, citing the need to support a more fragile job market.

The Minneapolis Fed chief, who does not vote on monetary policy this year but participates in the Federal Open Market Committee’s deliberations, had previously expected two total rate reductions would be necessary in 2025. The Fed has two more policy meetings this year, in October and December.

Kashkari added that the central bank shouldn’t be on a “preset course for a series of rate cuts.” He said he would support holding the policy rate steady should the labor market prove more resilient than it currently seems or if inflation moves higher, and would even consider raising rates if the economy demands it.

Hiring has slowed significantly over the past few months and the unemployment rate climbed to 4.3% in August, the highest since 2021. While a sharp decrease in immigration has brought down the so-called breakeven pace of hiring — the level at which new hiring matches population growth — that likely accounts for only one third or half of the decline in job creation, Kashkari said.

A rapid further deterioration in the labor market is probably a greater risk right now than a large upside surprise to inflation, he said. He also noted that it’s likelier that inflation stays near its current level — which is above the Fed’s 2% goal — rather than accelerating significantly.

Neutral Rate
Kashkari said he revised up his estimate of the neutral rate of interest to 3.1%. That level, where rates neither weigh on nor stimulate the economy, has likely moved up over the last few years due to a variety of factors, he said. Those could include a shifting of investment into more efficient industries, like AI and other technologies, and an increase to the cost of foreign capital due to tariffs.

Kashkari has written frequently on the neutral rate over the past few years.

“In this view, monetary policy might not be particularly tight, and even if the FOMC embarks on a number of policy cuts, long-term interest rates might not fall as much in response,” Kashkari said, pointing to the lack of response in some credit rates over the past year even as the Fed lowered its benchmark by a full percentage point in the last few months of 2024.

That could have implications for other parts of the economy, too, he argued.

“The housing market might not actually experience much relief from rate cuts,” Kashkari said.

He also pointed to the possibility of political interference damaging the Fed’s independence and eroding confidence in the central bank’s ability to control inflation. That’s been been an increasing concern for investors and economists amid President Donald Trump’s threats to the institution.

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Kashkari said he believes the FOMC is strongly committed to lowering inflation to the Fed’s target, but he also conceded that managing threats to Fed independence “is outside the control of the FOMC.”