Minneapolis Fed President Neel Kashkari said overnight that with the neutral policy rate near 3%, interest rates have “some room to come down gently” over the next couple of years.
Nevertheless, he noted what while headline inflation is being pushed higher by tariffs on goods, other areas like housing are experiencing disinflation, leaving overall price pressures essentially “going sideways.”
Kashkari described the current backdrop as a “tricky situation,” with inflation still too high but the labor market clearly cooling. He stressed that policymakers will need to watch developments carefully before drawing firm conclusions about the path of policy.
While acknowledging risks, Kashkari said he is not forecasting a recession. Instead, he expects the cooling in the labor market to continue in a “somewhat gentle” fashion, suggesting the Fed can gradually reduce rates without tipping the economy into contraction.
