- Minneapolis Fed President Kashkari reiterated at a St. Paul Chamber of Commerce event that the Federal Reserve is extremely serious about curbing inflation and emphasized that the geopolitical premium caused by the recent Iran conflict is intensifying upward pressure on prices.
- The decision-makers' assessment of the labor market has shown marginal improvement. Kashkari, one of the members who voted against at the April meeting, continues to advocate for retaining the option to raise interest rates in the monetary policy statement, demonstrating caution against prematurely shifting to easing.
- Regarding the Senate's imminent confirmation of Kevin Walsh as the new Fed Chair and the executive branch's call for rate cuts, Kashkari emphasized that the Federal Open Market Committee's decision-making mechanism is collective, with the Chair holding only one of the 12 voting rights, requiring consensus to drive policy paths.
Repricing of Inflation Stickiness and Geopolitical Premium
Recent macroeconomic data developments are reshaping market expectations for the Fed's policy trajectory. Kashkari's remarks highlight the internal hawkish camp's concerns about current price levels. Although the core personal consumption expenditures price index showed signs of slowing in recent quarters, the disruption in the oil supply chain caused by the Iran regional conflict is spreading to broader inflation through energy costs. This supply-side shock-induced imported inflation significantly constrains the Fed's policy space for demand management. If oil prices remain high, the rebound in commodity inflation may offset efforts to cool service sector inflation, forcing the market to reassess the expected terminal value of the federal funds rate within the year.
Policy Implications of Marginal Improvement in the Labor Market
Regarding employment data, Kashkari noted that the labor market has slightly improved compared to earlier this year. This statement reflects a moderate correction in the supply-demand mismatch between non-farm payroll additions and job vacancy rates. However, the resilience of the labor market is a double-edged sword. On one hand, it provides foundational support for a soft landing of the U.S. economy; on the other hand, a robust wage growth trend may translate into sustained consumer purchasing power, providing more enduring underlying momentum for inflation. Under this logic, if the Fed signals rate cuts too early, it may trigger overly rapid easing of financial conditions, putting the achievements of the previous tightening cycle at risk.
Power Balance within the Federal Open Market Committee
As Washington's political cycle progresses, the leadership changes at the Fed have become a focal point for capital markets. Donald Trump has clearly expressed expectations for a rate-cutting cycle under the new Chair, putting the central bank's independence under public scrutiny. Kashkari's response to this issue clearly outlines the internal governance structure of the Federal Open Market Committee. Although the Chair has extraordinary influence in agenda setting and communication with Congress, the final benchmark interest rate decision must undergo thorough debate and voting by members with voting rights. This institutional design mechanically smooths the impact of a single leader's change on the continuity of monetary policy.
Potential Path for Upward Revision of Terminal Rate Expectations
At the April monetary policy meeting, Kashkari advocated for reflecting an open attitude towards rate hikes in the post-meeting statement, a stance that is particularly crucial in the current complex external environment. If inflation data shows stronger stickiness in the next two months, or if geopolitical conflicts lead to a trend of supply-demand imbalance in the commodity market, it is not ruled out that more members may raise the rate center in the economic forecast summary's dot plot assessment. Market participants are currently mainly digesting the extent of rate cuts within the year, but the pricing of tail risks in the options market has begun to reflect the demand for hedging against policy inaction or even renewed tightening.
