It’s too early for the Federal Reserve to begin cutting interest rates despite increasing concerns about low inflation and an escalating trade war, said Minneapolis Fed President Neel Kashkari.
“Either of those could be cause for changing the path of monetary policy,” Kashkari told Bloomberg Television on Friday. “I’m not quite there yet. I take a lot of comfort from the fact that the job market continues to be strong.”
Kaskhari, one of the more dovish policy makers at the U.S. central bank, will be a voter next year on monetary policy.
His remarks follow comments Thursday from Fed Vice Chair Richard Clarida opening the door to a rate cut if risks to the economic outlook worsened, while stressing the U.S. economy was in a “very good place.”
Financial markets gyrated after President Donald Trump opened a new front in the trade war Thursday evening in tweets threatening to implement escalating tariffs on imports from Mexico if it did not take steps to prevent illegal immigration into the U.S.
The U.S. stock market opened sharply lower Friday and the S&P 500 Index is now down more than 6% from the April 30 record high. Shares of automakers, in particular, took a beating. Investors also increased bets on Fed rate cuts this year amid the turmoil.
“Mexico is different than China,” Kashkari said, pointing to the amount of integration between the U.S. and Mexican economies. “If we got into a tariff battle with Mexico, I think, personally, that could be much more costly to the U.S. economy and have a much more direct effect on business confidence, which would then cause them to retrench, and that could lead to an economic slowdown.”
A measure of underlying inflationary pressures Fed officials watch closely ticked up to 1.6% in the 12 months leading to April, according to a Commerce Department report published Friday. It’s fallen below the Fed’s 2% target in 2019 after spending most of last year close to the goal. Many policy makers believe the shortfall to be “transitory,” according to minutes of their most recent meeting on April 30-May 1.
“As we’ve had this 2% inflation target, we’ve been pretty consistently under the target the entire time,” Kashkari said, referring to the adoption of the goal in 2012. “My reading of it, with my economists here in Minneapolis, is that inflation expectations are anchored at around 1.7%, which doesn’t seem like a big miss, but actually that saps our ability to respond to future economic downturns.”