Minneapolis Fed President Neel Kashkari stated at an event overnight that he expects “some more modest cuts” in interest rates over the coming quarters, to bring rates closer to a neutral level. However, Kashkari emphasized that the pace and size of future cuts will be heavily dependent on incoming data.
The concept of a “neutral” rate refers to the point where borrowing costs neither accelerate nor hinder economic growth. According to Kashkari, the economy’s current resilience suggests that the neutral rate may be higher than previously estimated.
However, Kashkari also highlighted a key risk that could alter this outlook. If significant weakness were to emerge in the labor market, Fed might need to lower rates faster than currently anticipated.
“If we saw real evidence that the labor market is weakening quickly, that would tell me, as one policymaker, that maybe we ought to bring down our interest rate more quickly than I currently expect,” he explained.
Fed’s Schmid favors gradual rate cuts, avoid outsized moves
Kansas City Fed President Jeffrey Schmid emphasized a measured approach to monetary policy, stating that while he supports reducing the restrictiveness of current rates, his preference is to “avoid outsized moves.”
“Lowering rates in a gradual fashion would provide time to observe the economy’s reaction to our interest rate adjustments and give us the space to assess at what level interest rates are neither restricting nor boosting the economy,” Schmid explained.
He also highlighted that the neutral rate, the level where interest rates neither stimulate nor restrict economic growth, is likely to be “well above” the levels seen during the pre-pandemic period.
Schmid also warned that aggressive rate cuts could foster an expectation of continued rapid cuts, which could amplify financial market volatility. “My belief is that a cautious and gradual approach to policy adjustments would be best suited for this uncertain environment,” he said.