Central bank official warns of job market risks, sees inflation staying above target
Federal Reserve Bank of Minneapolis President Neel Kashkari suggested that further interest rate cuts could be on the table this year, pointing to growing risks in the labor market and the muted long-term impact of tariffs on inflation. In a detailed essay, Kashkari outlined his rationale for supporting the central bank’s recent quarter-point rate cut and advocated for additional reductions at the Fed’s final two meetings of 2025.
“For me the more likely risk is a rapid further weakening of the labor market. We know from past economic cycles that when labor markets weaken, they can weaken quickly and non-linearly,” Kashkari said in an overnight essay, pointing to a sharp slowdown in hiring and an uptick in unemployment to 4.3% in August, the highest since 2021.
“I believe the risk of a sharp increase in unemployment warrants the committee taking some action to support the labor market.”
Kashkari, who does not hold a vote on monetary policy this year but participates in the Federal Open Market Committee’s (FOMC) deliberations, revised his outlook to favor three total cuts in 2025, one more than he previously anticipated.
Inflation, tariffs, and the neutral rate
Kashkari argued that inflation is unlikely to climb much higher than 3% in the near term. "Unless there is some large increase in tariff rates from here or some other supply side shock, it is hard for me to see inflation climbing much higher than 3 percent given announced tariff rates and the relatively small share of imported goods in overall U.S. consumption," he wrote.
He also revised his estimate of the neutral rate of interest—the level at which monetary policy neither stimulates nor restrains the economy—to 3.1%, citing factors such as increased investment in technology and higher costs of foreign capital. “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 much in response,” Kashkari said. He cautioned that this could mean limited relief for the housing market, even as rates decline.
Fed independence and political pressure
Kashkari also downplayed concerns that the Fed’s independence is under threat, despite ongoing political pressure from the Trump administration and the recent appointment of Stephen Miran, a former White House adviser, to the Fed board.
He emphasized the importance of central bank independence, noting that recent developments in the bond market suggest the public still trusts the Fed’s ability to manage inflation.
