Uncertainties surround the current U.S. economy, and inflation has been moving sideways the past few months rather than showing signs of consistent declines, said Neel Kashkari, president and CEO of the Federal Reserve Bank of Minneapolis and a member of the Federal Open Market Committee, during a LinkedIn Live with Pensions & Investments.
“We really need to watch inflation data to hopefully gain confidence that inflation is well on its way back down to (the Fed’s) 2% target,” he told P&I Editor-in-Chief Jennifer Ablan during the LinkedIn Live interview April 4. “We need to see some more progress (on the inflation front) before we are confident enough to start a rate-cutting cycle.”
Indeed, at the Fed’s last meeting March 19-20, the central bank elected to keep the fed funds rate frozen at a range of between 5.25% and 5.5% for the fifth straight time, unwilling to pull the trigger on rate cuts quite so soon.
Kashkari noted that in March he had projected two rate cuts this year, but he cautioned that “if we continue to see inflation moving sideways then that would make me question whether we needed to do those rate cuts at all.”
Kashkari also said the economy has been “very resilient” in the face of prior aggressive rate hikes. Thus, if the economy sees continued strong job growth, strong consumer spending and strong GDP growth — that would likely further preclude the need for rate cuts.
“Maybe the (macroeconomic) dynamics that we have now are sustainable, but there are a lot of ifs in this scenario,” he added. “We need to see what ultimately happens with the labor market and with inflation.”
The Minneapolis Fed chief also asserted that rate hikes are certainly not “off the table,” although that scenario is unlikely at the moment. If inflation remains more persistent, the Fed will probably hold rates unchanged for an extended period of time “to see if that ultimately does the trick.” However, if this policy is not sufficient to bring down inflation to the 2% target in a reasonable period of time, Kashkari indicated the Fed “would consider raising rates.”
Kashkari scoffed at the notion of changing the Fed’s 2% inflation mandate to something higher, to, say, 3%. Moving the goal post like that, he said, would undermine the credibility of the Fed over the long term.
Regarding the strong performance of the markets so far this year, Kashkari, a former employee of Goldman Sachs, suggested that Wall Street is “prone to exuberance” where ”one piece of good news is extrapolated forever.”
Artificial intelligence has been swept by hype, Kashkari said, but he hopes that even if only 10% of the predictions about AI come true, that would boost the economy and increase productivity.
Concerning the phenomenal growth of the private credit asset class, Kashkari had two personal viewpoints. “To the extent that loan activity is moving from a bank to a private credit vehicle, it seems to be a less risky proposition for the financial system, as banks are levered 10-to-1, while most private credit vehicles are unlevered or levered 1-to-1,” he said.
But their liquidity profiles are vastly different — banks have real-time liquidity, while private credit vehicles have much longer-term liquidity.
“Most of the private credit loans are funding buyouts at higher valuations than the banks would otherwise underwrite,” he said. ”So, if there’s a bunch of companies being bought at higher valuations with more leverage being enabled by private credit then maybe those individual firms are at a broader risk if there’s an economic downturn.”
Noting the one-year anniversary of the collapse of Silicon Valley Bank, Kashkari said he expects an increase in merger activity — as more midsize banks seek to get bigger to prevent any form of collapse, i.e. to become a bank that is “too big to fail.”
“Small-size banks will merge to become midsized banks and midsized banks will merge to become big banks,” he said. “That’s an outcome of the regulatory system that we have today that has allowed some banks to become too big to fail.”
A skeptical Kashkari sees bitcoin as a “consumer protection issue” as some consumers are investing in a very volatile asset class they might not understand. “There’s a lot of fraud, hype and confusion so I am worried from a consumer perspective,” he said.
Bitcoin “has been around for more than a decade and there’s still no legitimate use case (for bitcoin) in an advanced democracy,” Kashkari said.
Concerning the ongoing retirement crisis on which prominent figures, including BlackRock CEO Larry Fink, have focused, Kashkari said he largely agrees that a solution must be found.
Kashkari noted that as medical advances extend life expectancies, more people will live longer, but they might also have to work longer.
The real challenge will be those people who live longer but will not be able to work due to their health woes or some other hardship. “This is a real hard public policy problem to solve,” he noted. Even if the retirement age is not raised, Kashkari said, some people may opt to return to work anyway if they determine that their Social Security or their retirement payments are not sufficient — this would become a “default solution” for them.
“What are we going to do for folks who are not able to (return to work),” he asked.
Regarding defined benefit plans, Kashkari said that’s a “debate between employees and employers and these pendulums tend to swing back and forth.”
At the Fed, he noted, younger workers see little or no value in DB plans because “they don’t plan sticking around long enough that they’re gonna be collecting on it.”
