War Creates Uncertainty for Rate Path Says Fed's Kashkari (Full Panel)

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The president's war has obviously disrupted oil prices, sending them up over the last couple of days. That means gasoline prices go up, so inflation goes up. But the Fed has some experience dealing with this.

Sets up the core topic: the immediate oil price shock from geopolitical conflict and its inflationary implications, framing it within the Fed's historical context of dealing with commodity shocks.

Mike

Neel Kashkari

When Russia invaded Ukraine, it sent a commodity shockwave. I was on Team Transitory, which was wrong. We raised rates aggressively partly because of that shock. Now, with recent events, the question is: will this look more like Russia-Ukraine (major shock) or more like Hamas-Israel (limited shock)? It's too soon to know the imprint on inflation.

We've seen a hockey stick in gasoline prices. Oil is used in many products. How long do we need to see elevated prices before it gets into core inflation?

Mike

Neel Kashkari

Energy eventually affects core goods and services, but that process takes a while. The bigger issue is if headline inflation stays elevated for an extended period after five years of high inflation. We must watch long-run expectations.

Neel Kashkari

Coming into this moment, I was feeling pretty good. Inflation is slowly heading right, labor market is good but softening. Policy was in a good place to glide back to neutral. Now we need to see how long and how big this new shock's effect is.

The consensus seems to be we're at peak tariffs. You've said inflation should come down in the second half. Has the Supreme Court ruling on tariffs changed that view, creating uncertainty?

Mike

Neel Kashkari

The ruling introduces uncertainty, which is a drag. I haven't seen evidence the new tariff regime will lead to a new round of elevated inflation. The administration wants to recreate previous tariffs. I don't see scenarios for substantially higher tariffs, so I don't expect it to delay the expected deceleration of inflation.

Where do you put yourself? You need a new dot plot. Any move in March? When might you consider a cut?

Mike

Neel Kashkari

In December, I had one dot for 2026, meaning one expected cut later this year. Housing inflation is trending down. Core goods up due to tariffs. Services inflation slowly trending down with the labor market. That gave me confidence for one cut. Now, with geopolitical events, we need more data.

Every dot plot says the Fed will hit its target two years out. Will you ever really hit it?

Mike

Neel Kashkari

We have to hit it for credibility. The neutral rate is a big question. The economy's resilience suggests the neutral rate must be higher, at least in the near term.

At the last meeting, focus shifted from labor market back to inflation. Are risks balanced?

Mike

Neel Kashkari

They feel more balanced, setting aside recent events. An anecdote from North Dakota suggests less underlying organic demand for labor. I balance that against inflation still being too high but gently trending down.

What are businesses telling you about the low-hire environment? Is it uncertainty or AI?

Mike

Neel Kashkari

It's domestic/global uncertainty and finding they can get by. Virtually every large business is using AI in specific pockets, doing things more efficiently. This affects hiring decisions early in the adoption phase.

Some argue AI means lower rates (productivity), others higher (investment/demand). Where do you come down?

Mike

Neel Kashkari

AI is massively capital intensive. The economy reallocates capital through higher rates. Long-term, AI could lower the neutral rate. In the near term, it's probably pushing it up. In the 90s, Greenspan held rates at about 5% during a productivity boom; we're well below that now.

What are CEOs telling you about pricing? Need to raise prices because of tariffs?

Mike

Neel Kashkari

Most common comment: expected repricing at start of year after passing on costs last year. Seeing some continued pass-through, but not hearing of major new inflation waves. It's a slow adjustment to last year's tariffs.

Your forecast for inflation this year?

Mike

Neel Kashkari

Somewhat lower by year-end. Housing inflation trending down confidently. Core goods inflation should be short-lived unless new tariffs. Core services tied to wages should come down with labor market. That gave confidence inflation was heading right before recent events.

How much confidence in your March forecasts?

Mike

Neel Kashkari

Had a lot of confidence until a couple days ago. Now back to the core question: does this look more like Russia-Ukraine or Hamas-Israel? I don't know yet. We need to wait and see.

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