WEBVTT - Neel Kashkari Talks Inflation, Interest Rates

0:00:02.440 --> 0:00:06.760
<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news.

0:00:07.120 --> 0:00:09.479
<v Speaker 2>There's been a lot of talk about how persistent inflation

0:00:09.560 --> 0:00:12.040
<v Speaker 2>has shown itself to be. You're pretty early on, at

0:00:12.119 --> 0:00:14.680
<v Speaker 2>least amongst FED members are saying don't get too ahead

0:00:14.720 --> 0:00:17.000
<v Speaker 2>of yourselves and talking about cutting rates.

0:00:17.280 --> 0:00:18.560
<v Speaker 1>A lot's change, at least from the.

0:00:18.560 --> 0:00:20.200
<v Speaker 2>Data that we've gotten over the last I don't know

0:00:20.280 --> 0:00:22.880
<v Speaker 2>three months or so. Has that changed your view as

0:00:22.920 --> 0:00:24.520
<v Speaker 2>well about staying where we are?

0:00:24.880 --> 0:00:25.079
<v Speaker 3>Well?

0:00:25.160 --> 0:00:29.040
<v Speaker 4>The second half of twenty twenty three surprised us at

0:00:29.080 --> 0:00:32.519
<v Speaker 4>how rapidly inflation fell. That was really good news, and

0:00:32.600 --> 0:00:35.639
<v Speaker 4>the economy remains strong. We all hope that was going

0:00:35.680 --> 0:00:39.280
<v Speaker 4>to continue. The first quarter of this year, it seems.

0:00:38.960 --> 0:00:39.840
<v Speaker 3>Like it's stalled out.

0:00:40.120 --> 0:00:42.680
<v Speaker 4>So it's a little too soon to declare that we're

0:00:42.720 --> 0:00:45.680
<v Speaker 4>definitely stalled out, or maybe it's just taking more time.

0:00:46.200 --> 0:00:48.040
<v Speaker 4>I think we're in a good place right now. Labor

0:00:48.080 --> 0:00:50.680
<v Speaker 4>market is still strong. We could take our time to

0:00:50.760 --> 0:00:54.240
<v Speaker 4>get more data to see if disinflation is going to continue,

0:00:54.520 --> 0:00:56.360
<v Speaker 4>and if it does, great, If.

0:00:56.280 --> 0:00:58.400
<v Speaker 3>It doesn't, then we need to take that on board.

0:00:58.720 --> 0:01:01.760
<v Speaker 1>What is the complexion right now of disinflation?

0:01:02.040 --> 0:01:04.120
<v Speaker 2>What actually drove us at least down to the level

0:01:04.120 --> 0:01:05.120
<v Speaker 2>where we're at right now.

0:01:05.200 --> 0:01:07.440
<v Speaker 4>Most of the gains that we saw last year were

0:01:07.520 --> 0:01:12.520
<v Speaker 4>supply side improvements, Supply chains getting better, Americans coming back

0:01:12.560 --> 0:01:15.560
<v Speaker 4>to work, a lot more workers entering the labor force.

0:01:15.600 --> 0:01:16.720
<v Speaker 3>That's really positive.

0:01:17.440 --> 0:01:22.200
<v Speaker 4>I don't think monetary policy actually brought demand down that much,

0:01:22.600 --> 0:01:24.360
<v Speaker 4>and so most of the gains well because of the

0:01:24.360 --> 0:01:27.959
<v Speaker 4>supply side. Now, the question is if monetary policy has

0:01:28.040 --> 0:01:30.480
<v Speaker 4>to take us the rest of the way there, is

0:01:30.560 --> 0:01:33.040
<v Speaker 4>it tight enough to do that. I wrote an essay

0:01:33.040 --> 0:01:36.160
<v Speaker 4>today on our website raising that question, and I'm not

0:01:36.200 --> 0:01:38.640
<v Speaker 4>sure how tight monetary policy is.

0:01:38.880 --> 0:01:40.320
<v Speaker 3>We need more data to assess it.

0:01:40.520 --> 0:01:44.240
<v Speaker 5>How do we know that the inflationary process has still

0:01:44.400 --> 0:01:46.560
<v Speaker 5>some ways to go, or how do we know that

0:01:46.600 --> 0:01:49.240
<v Speaker 5>maybe this is it, this is the new normal.

0:01:49.600 --> 0:01:51.880
<v Speaker 4>Well, it's not the new normal because it's three percent

0:01:52.000 --> 0:01:55.760
<v Speaker 4>and the Fed can and will achieve two percent. The

0:01:55.880 --> 0:02:00.280
<v Speaker 4>question is if disinflation is still underway, then maybe it'll

0:02:00.280 --> 0:02:01.840
<v Speaker 4>continue on its own, and we.

0:02:01.760 --> 0:02:04.320
<v Speaker 3>Can then take that on board. If we need to

0:02:04.360 --> 0:02:05.520
<v Speaker 3>hold rates where they.

0:02:05.440 --> 0:02:08.040
<v Speaker 4>Are for an extended period of time to tap the

0:02:08.080 --> 0:02:10.640
<v Speaker 4>brakes on the economy, or if we even needed to

0:02:10.720 --> 0:02:12.720
<v Speaker 4>raise we would do what we need to do to

0:02:12.720 --> 0:02:13.720
<v Speaker 4>get inflation back down.

0:02:13.880 --> 0:02:15.560
<v Speaker 1>I have to dis ask you though about two percent.

0:02:15.720 --> 0:02:18.040
<v Speaker 2>And I know why the FED stands by that two percent,

0:02:18.400 --> 0:02:20.480
<v Speaker 2>But I talk to people around the room this week

0:02:20.520 --> 0:02:23.480
<v Speaker 2>here and their cost of capital. They're basing that more

0:02:23.560 --> 0:02:26.520
<v Speaker 2>on closer to a three percent rate. And the idea

0:02:26.600 --> 0:02:30.280
<v Speaker 2>is they're saying, look, the two percent target that needs

0:02:30.280 --> 0:02:33.240
<v Speaker 2>to come up. That that's not the reality long term structurally,

0:02:33.400 --> 0:02:34.839
<v Speaker 2>at least not for the folks in this room.

0:02:34.919 --> 0:02:37.240
<v Speaker 3>Yeah, I disagree with that. I mean, I think that.

0:02:37.520 --> 0:02:39.840
<v Speaker 4>Ultimately the central bank, whether it's the FED or the

0:02:39.880 --> 0:02:43.200
<v Speaker 4>ECB or the Bank of England, can determine whatever the

0:02:43.240 --> 0:02:46.920
<v Speaker 4>inflation rate is, and over time, if they conduct their

0:02:46.960 --> 0:02:51.080
<v Speaker 4>policy appropriately, people will come to understand that will adjust

0:02:51.080 --> 0:02:51.760
<v Speaker 4>their behavior.

0:02:52.000 --> 0:02:52.840
<v Speaker 3>We're committed to.

0:02:52.800 --> 0:02:55.400
<v Speaker 4>Two percent, we will get to two percent, and we

0:02:55.440 --> 0:02:58.239
<v Speaker 4>will get an interest rate environment necessary in order to

0:02:58.320 --> 0:02:59.200
<v Speaker 4>achieve two percent.

0:02:59.360 --> 0:03:01.079
<v Speaker 5>You know, one of the arguments, though, Neil, is that

0:03:01.200 --> 0:03:04.600
<v Speaker 5>the idea of near shoring, bringing things back home, building

0:03:04.639 --> 0:03:06.720
<v Speaker 5>chips in America, that's going to create They're going to

0:03:06.760 --> 0:03:09.120
<v Speaker 5>be more expensive than if we were building them overseas,

0:03:09.320 --> 0:03:12.359
<v Speaker 5>and that is going to be you know, consistent inflationary

0:03:12.360 --> 0:03:15.840
<v Speaker 5>pressures longer term, there are some macro forces underway, why

0:03:15.919 --> 0:03:17.960
<v Speaker 5>not think that it's got to be about two percent?

0:03:18.560 --> 0:03:21.800
<v Speaker 4>I think those trends are real, but those would suggest

0:03:21.800 --> 0:03:24.120
<v Speaker 4>to me a one time increase in the price level,

0:03:24.600 --> 0:03:28.960
<v Speaker 4>not necessarily an ongoing increase of inflation at a higher

0:03:29.040 --> 0:03:32.040
<v Speaker 4>level that we believe and I believe that the monetary

0:03:32.080 --> 0:03:36.760
<v Speaker 4>authority can ultimately long run determine the inflation of the economy,

0:03:37.000 --> 0:03:40.120
<v Speaker 4>but the rate environment necessary to achieve that may be

0:03:40.240 --> 0:03:42.400
<v Speaker 4>different depending on these broader macro forces.

0:03:42.560 --> 0:03:43.800
<v Speaker 5>So rate cut this year?

0:03:43.960 --> 0:03:45.360
<v Speaker 3>Should we take it off the table?

0:03:45.520 --> 0:03:46.720
<v Speaker 5>Is it still a possibility?

0:03:46.800 --> 0:03:48.680
<v Speaker 3>It's certainly still a possibility. We need to let the

0:03:48.680 --> 0:03:50.080
<v Speaker 3>inflation data tell us.

0:03:50.400 --> 0:03:52.080
<v Speaker 4>I mean, I think my colleagues and I we all

0:03:52.080 --> 0:03:55.000
<v Speaker 4>have a range of views on where the economy is going,

0:03:55.320 --> 0:03:57.720
<v Speaker 4>but we're all committed to letting the data guide us.

0:03:57.960 --> 0:03:58.920
<v Speaker 3>And if the data.

0:03:58.680 --> 0:04:02.680
<v Speaker 4>Comes in in a pause, the manner suggesting disinflation continues

0:04:02.920 --> 0:04:03.560
<v Speaker 4>will adjust.

0:04:03.720 --> 0:04:06.440
<v Speaker 1>Oh, go ahead, But is it just housing pressure?

0:04:06.480 --> 0:04:08.400
<v Speaker 5>Like you write a lot about housing pressure, We talk

0:04:08.440 --> 0:04:10.200
<v Speaker 5>about it, We're talking to with a lot of people

0:04:10.200 --> 0:04:12.880
<v Speaker 5>in the real estate sector. There's not enough supply of

0:04:13.240 --> 0:04:16.479
<v Speaker 5>houses out there, and that's creating inflation on the housing front.

0:04:16.640 --> 0:04:18.640
<v Speaker 1>Is it just housing pressures that you guys.

0:04:18.520 --> 0:04:20.440
<v Speaker 5>Are really focusing on, or that you're focusing on.

0:04:20.600 --> 0:04:24.279
<v Speaker 4>I'm focusing on housing first of all, because it's traditionally

0:04:24.279 --> 0:04:27.120
<v Speaker 4>the most interst rate sensitive sector of the economy.

0:04:27.440 --> 0:04:29.040
<v Speaker 3>And if the most interst rate.

0:04:28.960 --> 0:04:32.560
<v Speaker 4>Sensitive sector is not showing as much disinflation as I

0:04:32.560 --> 0:04:35.880
<v Speaker 4>would have thought, for example, new lease rates appear to

0:04:35.880 --> 0:04:36.960
<v Speaker 4>be climbing back again.

0:04:37.160 --> 0:04:39.200
<v Speaker 3>Yeah, that's surprising to me. Why is that?

0:04:39.600 --> 0:04:42.680
<v Speaker 4>That makes me wonder is policy as tight as I

0:04:42.720 --> 0:04:45.520
<v Speaker 4>would have otherwise assumed. We are seeing some effect of

0:04:45.560 --> 0:04:50.080
<v Speaker 4>monetary policy on credit card delinquencies, on auto loan delinquencies,

0:04:50.320 --> 0:04:53.559
<v Speaker 4>especially for lower credit score borrowers. So it is having

0:04:53.600 --> 0:04:56.320
<v Speaker 4>some effect, but it's not having as much effect as

0:04:56.320 --> 0:04:56.960
<v Speaker 4>I would have guessed.

0:04:57.000 --> 0:04:58.679
<v Speaker 1>By now, I know we have the benefit of hindsight.

0:04:58.720 --> 0:05:00.160
<v Speaker 2>But you go back to when the rate high king

0:05:00.200 --> 0:05:04.120
<v Speaker 2>cycle effectively pause. Do you think that the Feds should

0:05:04.160 --> 0:05:06.279
<v Speaker 2>have kept going with hikes meeting additional heights.

0:05:07.080 --> 0:05:07.600
<v Speaker 3>I don't know.

0:05:07.839 --> 0:05:11.040
<v Speaker 4>I mean, I think that there are lags in monetary policy,

0:05:11.560 --> 0:05:15.640
<v Speaker 4>and we saw such rapid disinflation in the second half

0:05:15.680 --> 0:05:16.360
<v Speaker 4>of last year.

0:05:16.520 --> 0:05:18.040
<v Speaker 3>I mean, it was a really.

0:05:17.800 --> 0:05:22.039
<v Speaker 4>Wonderful scenario that was real and that surprised us, and

0:05:22.120 --> 0:05:24.640
<v Speaker 4>so it's reasonable to say, let's just let that continue.

0:05:24.960 --> 0:05:27.440
<v Speaker 3>Maybe it'll take us all the way home. It ended

0:05:27.480 --> 0:05:29.040
<v Speaker 3>up shawling out at least for a little bit.

0:05:29.160 --> 0:05:31.760
<v Speaker 2>You feel like you can accurately assess those lags, what

0:05:31.800 --> 0:05:34.360
<v Speaker 2>those lags are, because even when you talk about this inflation,

0:05:34.440 --> 0:05:36.600
<v Speaker 2>you acknowledge yourself a lot of that is driven by

0:05:36.600 --> 0:05:39.000
<v Speaker 2>supply side issues and not just monetary policy.

0:05:39.240 --> 0:05:40.719
<v Speaker 1>How do you assess what the balance is?

0:05:40.839 --> 0:05:41.600
<v Speaker 3>Yeah, it's hard.

0:05:41.880 --> 0:05:42.039
<v Speaker 2>You know.

0:05:42.080 --> 0:05:44.480
<v Speaker 4>For example, in the housing market, which we're talking about,

0:05:44.720 --> 0:05:47.680
<v Speaker 4>we know a lot of Americans refinanced their homes that

0:05:47.839 --> 0:05:50.839
<v Speaker 4>when the mortgage rates were very low, and so they're

0:05:50.880 --> 0:05:53.760
<v Speaker 4>not feeling the pinch of higher rates because they have

0:05:53.800 --> 0:05:56.839
<v Speaker 4>not had to refinance. And so that happens that happened

0:05:56.839 --> 0:05:59.080
<v Speaker 4>in the late nineteen seventies and early eighties as well.

0:05:59.520 --> 0:06:02.640
<v Speaker 4>That's of the lag in the policy process. So we

0:06:02.680 --> 0:06:04.400
<v Speaker 4>have a lot of data that we look at and

0:06:04.480 --> 0:06:06.560
<v Speaker 4>we ultimately have to use judgment to try to put

0:06:06.560 --> 0:06:06.960
<v Speaker 4>it together.

0:06:07.080 --> 0:06:10.560
<v Speaker 5>Speaking of data growth, we're doing okay. Jay Powell consistently

0:06:10.600 --> 0:06:12.360
<v Speaker 5>reminds us this is a good thing.

0:06:12.440 --> 0:06:12.960
<v Speaker 1>We hear it.

0:06:12.960 --> 0:06:16.640
<v Speaker 5>We feel it here at Milken. Is there the possibility

0:06:16.680 --> 0:06:18.480
<v Speaker 5>that you don't even have to cut rights at all

0:06:18.560 --> 0:06:21.040
<v Speaker 5>this year because the economy is strong?

0:06:21.120 --> 0:06:22.240
<v Speaker 3>Well, no, that's you're right.

0:06:22.320 --> 0:06:25.960
<v Speaker 4>So if inflation moves sideways, and if the labor market

0:06:25.960 --> 0:06:28.839
<v Speaker 4>continues to be strong and growth continues to be strong,

0:06:28.880 --> 0:06:31.039
<v Speaker 4>then I would be in the camp of we shouldn't

0:06:31.080 --> 0:06:33.479
<v Speaker 4>do anything, just let this play out for an extended

0:06:33.520 --> 0:06:36.120
<v Speaker 4>period of time. If, on the other hand, we start

0:06:36.160 --> 0:06:39.160
<v Speaker 4>to see inflation come back down or meaningful weakness in

0:06:39.240 --> 0:06:41.760
<v Speaker 4>the labor market, then that might say we need to

0:06:41.760 --> 0:06:44.880
<v Speaker 4>start dialing back, or if inflation proves to.

0:06:44.800 --> 0:06:46.760
<v Speaker 3>Be more entrench we could have to go up.

0:06:46.960 --> 0:06:49.360
<v Speaker 1>Yeah, but is the economy is it strong for everyone?

0:06:50.320 --> 0:06:52.520
<v Speaker 3>Well, no, it's of course not. And we know that.

0:06:52.960 --> 0:06:56.039
<v Speaker 4>We know that the way policy works, it slows down

0:06:56.080 --> 0:06:59.560
<v Speaker 4>parts of the economy, and the lower income workers tend

0:06:59.640 --> 0:07:00.240
<v Speaker 4>to feel.

0:07:00.160 --> 0:07:03.279
<v Speaker 3>Pain the most. And that's I mean, I wish that

0:07:03.360 --> 0:07:04.239
<v Speaker 3>were not the case.

0:07:05.120 --> 0:07:08.040
<v Speaker 4>It's also frustrating that every time there's a piece of

0:07:08.080 --> 0:07:12.160
<v Speaker 4>good news, you see Wall Street rally, euphoria returns to

0:07:12.200 --> 0:07:14.760
<v Speaker 4>Wall Street, and yet there are people who are.

0:07:14.640 --> 0:07:15.320
<v Speaker 3>Feeling the pain.

0:07:15.680 --> 0:07:18.560
<v Speaker 4>So it's definitely uneven how this gets felt you did

0:07:18.600 --> 0:07:19.000
<v Speaker 4>mention that.

0:07:19.040 --> 0:07:21.040
<v Speaker 5>If inflation starts to go up, I thought I heard

0:07:21.080 --> 0:07:23.960
<v Speaker 5>you say we could have to increase the FED. That's

0:07:24.000 --> 0:07:26.480
<v Speaker 5>a smart narrative still to have out there, that you

0:07:26.560 --> 0:07:29.200
<v Speaker 5>could that the FED could possibly have to raise rates again.

0:07:29.520 --> 0:07:31.560
<v Speaker 3>Well, of course, I mean, we are data dependent.

0:07:31.640 --> 0:07:34.040
<v Speaker 4>We are committed to getting inflation back to our two

0:07:34.160 --> 0:07:36.760
<v Speaker 4>percent target, and we will do what we need to do.

0:07:36.840 --> 0:07:40.200
<v Speaker 4>Nobody has taken any rates completely off the table.

0:07:40.520 --> 0:07:41.679
<v Speaker 3>I think the bar is high.

0:07:42.000 --> 0:07:44.760
<v Speaker 4>Much more likely we would stay put for an extended

0:07:44.800 --> 0:07:46.960
<v Speaker 4>period of time and then we'll see where we are.

0:07:47.040 --> 0:07:49.040
<v Speaker 1>How would you actually prepare those the markets for that.

0:07:49.040 --> 0:07:50.280
<v Speaker 2>That's not the kind of thing you just want to

0:07:50.320 --> 0:07:52.960
<v Speaker 2>go into a meeting and surprise the markets line, I mean,

0:07:53.000 --> 0:07:54.200
<v Speaker 2>you need a little build up there.

0:07:54.240 --> 0:07:58.080
<v Speaker 4>I agree, But like there's no shortage OFFFED, there is

0:07:58.120 --> 0:08:03.440
<v Speaker 4>no shortage of ass to signal when people's perspectives are changing.

0:08:03.560 --> 0:08:04.600
<v Speaker 1>Is that FED communication?

0:08:04.720 --> 0:08:05.000
<v Speaker 3>Though?

0:08:05.520 --> 0:08:07.800
<v Speaker 2>Do you think it's fair? And by that, I mean

0:08:08.080 --> 0:08:10.320
<v Speaker 2>is it too much? Because you get so many different

0:08:10.360 --> 0:08:13.040
<v Speaker 2>opinions and in the media it's great, we love it,

0:08:13.240 --> 0:08:15.440
<v Speaker 2>but I feel like for investors sometimes it feels like, Okay,

0:08:15.480 --> 0:08:16.800
<v Speaker 2>we're getting too many people.

0:08:16.560 --> 0:08:20.880
<v Speaker 3>Telling them I understand their concerns. They're twelve ers are banks.

0:08:21.160 --> 0:08:24.560
<v Speaker 4>We represent regions of the country, so people across the

0:08:24.600 --> 0:08:27.920
<v Speaker 4>six states that the Minneapolis FED represents want to hear

0:08:27.960 --> 0:08:28.400
<v Speaker 4>from us.

0:08:28.760 --> 0:08:31.600
<v Speaker 3>Often I turn down ninety.

0:08:31.320 --> 0:08:34.200
<v Speaker 4>Five percent of my speaking invitations that I get, so

0:08:34.280 --> 0:08:37.200
<v Speaker 4>I go out across the district. I'm usually saying the

0:08:37.240 --> 0:08:40.880
<v Speaker 4>same thing, but in the spirit of transparency, I live

0:08:40.920 --> 0:08:43.440
<v Speaker 4>stream it so that can so I'm not giving any

0:08:43.480 --> 0:08:46.640
<v Speaker 4>secrets away, and if people want to watch it and

0:08:46.720 --> 0:08:49.560
<v Speaker 4>cover it, I can't control that, And so it's a

0:08:49.600 --> 0:08:52.400
<v Speaker 4>balancing act where we want to be transparent to the

0:08:52.440 --> 0:08:55.760
<v Speaker 4>constituents that we represent, and yet we also want to

0:08:55.920 --> 0:08:57.600
<v Speaker 4>show that we're not giving secrets away.

0:08:57.760 --> 0:08:58.600
<v Speaker 3>Doesn't cost curry.

0:08:58.640 --> 0:09:01.760
<v Speaker 5>I feel like there is more clarity of thought about

0:09:01.760 --> 0:09:04.280
<v Speaker 5>what the FED may do next, certainly here at milcine

0:09:04.320 --> 0:09:06.680
<v Speaker 5>this year around. But having talked to you, we could

0:09:06.760 --> 0:09:09.280
<v Speaker 5>cut rates, we could raise rates through data dependent I

0:09:09.320 --> 0:09:12.040
<v Speaker 5>get it. Do you at the FED and the FMC

0:09:12.200 --> 0:09:14.280
<v Speaker 5>feel like there is We're clarity about kind of where

0:09:14.320 --> 0:09:16.079
<v Speaker 5>we are in the economy and where the.

0:09:16.040 --> 0:09:17.240
<v Speaker 1>Trouble spots are. Well.

0:09:17.280 --> 0:09:20.240
<v Speaker 4>I think there's more clarity on our reaction function, which

0:09:20.280 --> 0:09:22.800
<v Speaker 4>is we are all committed to watching the data. We've

0:09:22.800 --> 0:09:24.959
<v Speaker 4>been Our models have not worked very well in the

0:09:25.040 --> 0:09:27.240
<v Speaker 4>last few years, so we have to watch the actual

0:09:27.280 --> 0:09:30.920
<v Speaker 4>inflation data that will guide us. We all agree on

0:09:30.960 --> 0:09:34.720
<v Speaker 4>that now, whether inflation goes sideways or continues to fall,

0:09:35.080 --> 0:09:37.560
<v Speaker 4>we have a range of perspectives on that. That's where

0:09:37.600 --> 0:09:40.560
<v Speaker 4>the deviations lie. But our commitments are doing what we

0:09:40.640 --> 0:09:43.360
<v Speaker 4>need to do. There's no deviation around the table on that.

0:09:43.600 --> 0:09:45.720
<v Speaker 2>Are you still paying a lot of attention to financial

0:09:45.720 --> 0:09:47.480
<v Speaker 2>markets and how they are reacting to Absolutely?

0:09:47.520 --> 0:09:50.200
<v Speaker 4>I mean it is a channel through which monetary policy

0:09:50.240 --> 0:09:51.640
<v Speaker 4>affects the real economy.

0:09:51.880 --> 0:09:54.880
<v Speaker 3>And when you know it took three negative inflation prints

0:09:54.920 --> 0:09:55.320
<v Speaker 3>in a row.

0:09:55.640 --> 0:09:58.240
<v Speaker 4>Markets started to take that on board, and then one

0:09:58.320 --> 0:10:01.240
<v Speaker 4>positive job report euphoria returns