WEBVTT - Neel Kashkari Talks Rates and Inflation

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news. Debate of a potential

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<v Speaker 1>US rate cut in December is ramping up as investors

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<v Speaker 1>look ahead to the latest reading on Wednesday of the

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<v Speaker 1>FETES Preferred price gauge. Minneapolis Fed President Neil Keshkari told

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<v Speaker 1>us what key fact is he's watching out four as

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<v Speaker 1>officials prepared for the final policy call of the year.

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<v Speaker 2>Right now, we know that inflation is somewhat above our target.

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<v Speaker 2>It's running around two and a half two point six

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<v Speaker 2>percent run rate. Right now, I have some confidence that

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<v Speaker 2>it's gently trending down, and right now the labor market

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<v Speaker 2>remains strong. The question, in my mind, the biggest question

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<v Speaker 2>is where is the neutral rate environment. You know, we've

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<v Speaker 2>had relatively high interest rates relatively the prior ten years,

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<v Speaker 2>and the US economies continue to grow with great resilience,

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<v Speaker 2>and the labor market has been resilient, And so how

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<v Speaker 2>do I reconcile the fact that the policy rate has

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<v Speaker 2>been relatively high and growth has been sustained. That suggests

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<v Speaker 2>to me that perhaps the neutral rate environment is higher

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<v Speaker 2>than it was in the past, and that perhaps monetary

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<v Speaker 2>policy is not putting as much downward pressure on the

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<v Speaker 2>economy as I would have expected. And so this is

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<v Speaker 2>what I'm trying to understand right now is how much

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<v Speaker 2>downward pressure are we putting on the economy and what

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<v Speaker 2>is the path for inflation. But right now, knowing what

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<v Speaker 2>I know today, you know, still considering a twenty five

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<v Speaker 2>basis point cut in December. It's a reasonable debate for

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<v Speaker 2>us to have.

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<v Speaker 1>Why not pause? You're talking about how resilient the economy is.

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<v Speaker 1>You talk about how resilient the labor force is, you

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<v Speaker 1>talk about how resilient all the factors are. And add

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<v Speaker 1>to that we have, you know, this rally in the

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<v Speaker 1>stock market. Why not just pause?

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<v Speaker 2>Well, you know, you're making good points that would argue

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<v Speaker 2>in favor of not cutting rates. On the other hand,

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<v Speaker 2>if I look at the underlying components of inflation, goods

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<v Speaker 2>inflation has fallen all the way back down to pre

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<v Speaker 2>pandemic levels. Services inflation is trending down, and that's tied

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<v Speaker 2>to wage growth, and wage growth is slowly trending down.

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<v Speaker 2>And what's left is housing inflation. Housing inflation is still high.

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<v Speaker 2>But if we look at forward leading indicators of where

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<v Speaker 2>housing inflation is likely going, and that's the inflation of

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<v Speaker 2>new rents that new rental inflation has already come back down,

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<v Speaker 2>so that suggests that housing inflation ought to come back down. Ultimately,

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<v Speaker 2>we want to get inflation back down to our two

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<v Speaker 2>percent target. We're not aiming to undershoot it, and so

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<v Speaker 2>we do have to make some judgments about what is

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<v Speaker 2>the path ahead for inflation, and that's going to be

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<v Speaker 2>an important determinant on what we do with monetary policy.

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<v Speaker 1>We also asked how Trump's star threats could affect global

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<v Speaker 1>trade and his views on Beijing's battle to revive its economy.

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<v Speaker 2>You know, there's obviously the risks of potential tear back

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<v Speaker 2>and forth between the US and China, which are notable.

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<v Speaker 2>The other big concern is just the domestic Chinese economy

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<v Speaker 2>and the slumber that it appears to be in from

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<v Speaker 2>our analysis, the heavy weight of the housing sector that

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<v Speaker 2>has been a driver of Chinese growth for so many

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<v Speaker 2>years is now appears to be weighing down the Chinese economy,

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<v Speaker 2>and just the struggles that the Chinese economy is facing.

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<v Speaker 2>And so I'm just something that I'm watching a lot

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<v Speaker 2>is what the policymakers in China do and can they

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<v Speaker 2>get the Chinese economy on a stronger sustainable growth path,

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<v Speaker 2>you know, reinflating so to speak. Their housing bubble doesn't

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<v Speaker 2>seem like it's a long term strategy. So what is

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<v Speaker 2>China's growth strategy? I agree the potential tarots between the

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<v Speaker 2>US and China and back and forth is something to

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<v Speaker 2>pay close attention to. But I think China's own domestic

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<v Speaker 2>challenges are also notable.

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<v Speaker 1>Do you think that if China's economy remains leg lost,

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<v Speaker 1>we could see some contagion and other Asian economies and

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<v Speaker 1>perhaps even for the afield may get impacted as well.

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<v Speaker 2>Certainly possible. I mean, China is obviously a huge economy

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<v Speaker 2>and of a huge part of the global economy, just

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<v Speaker 2>grows slowly. That's obviously going to have an imprint on

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<v Speaker 2>everybody else. For example, commodity markets would be one of

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<v Speaker 2>the first places that we would see that, whether it's

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<v Speaker 2>for steel or for iron or other metals or other minerals.

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<v Speaker 2>So that's something that we're going to pay closer attention

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<v Speaker 2>to because it just matters a lot for the global economy.

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<v Speaker 2>But then I also think many other Asian economies are

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<v Speaker 2>linked to economies all around the world. I was just

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<v Speaker 2>looking at some analysis on where the US imports most

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<v Speaker 2>of its goods. Of course, China dominated that six ten

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<v Speaker 2>years ago, and China shared exporting directly to the US

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<v Speaker 2>has actually fallen quite a bit, and countries like Mexico

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<v Speaker 2>and other southeastern Asian countries have picked up the slack,

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<v Speaker 2>and so I'm actually optimistic that other Asian economies could

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<v Speaker 2>contain need to perform well because they're connected to the US,

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<v Speaker 2>they're connected to Europe, to South America. But of course

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<v Speaker 2>China is just so large that what happens in China

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<v Speaker 2>matters to everybody.

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<v Speaker 1>That was Minneapolis FED President Neil Keshkari