Minneapolis Fed President Neel Kashkari said Wednesday that rising prices remain a concern despite the latest data being weaker than economists expected.
“Inflation is still too high,” Kashkari told CNBC’s Steve Reisman in an exclusive one-on-one interview as part of a New York Council on Foreign Relations event.
Kashkari’s comments followed Wednesday morning’s release of the August Personal Consumption Expenditure Price Index, known as the Federal Reserve’s preferred measure of inflation. The core index, which excludes volatile food and energy prices, fell below the 3% annualized rate expected by economists.
“There are various measures of inflation, but the inflation rate has been hovering around 3%,” Kashkari said. “Inflation has been rising for over five years. I didn’t think today’s inflation data would change that story much.”
Kashkari said other economic indicators on consumer spending and gross domestic product released Wednesday showed the economy was “resilient.”
Kashkari said he heard from a union leader at a roundtable several years ago that inflation was “worse” than a recession for his members. He said the conversation influenced his view of the trade-off between price stability and employment.
This month, the Federal Reserve decided to raise interest rates for the first time in three years in an effort to keep prices from rising above desired levels. The central bank also signaled further rate hikes could be on the horizon.
He said Wednesday that the labor market was “pretty good” but not “great.” On the same day, management services company ADP announced that private employment in September expanded more than economists expected.
Concerns about AI
Kashkari said he was raising his forecast for the neutral funds rate to 3.25% given the economy’s strength in the face of recent shocks. He said the neutral interest rate is likely to rise temporarily due to demand for investment funds due to the artificial intelligence boom.
Kashkari said that if AI is successfully built, it could increase the productivity of the U.S. economy. But Kashkari said he was concerned that the amount of corporate investment would not yield the intended results or would not happen as quickly as expected, both of which could weigh on the broader economy.
“The results have not yet borne fruit,” Kashkari said. “If this ends up being a large investment that doesn’t improve productivity as much as we envision, this could be a fraudulent investment and have a significant economic impact across the economy.”
Kashkari said the AI industry may need to learn how to use funding and resources more “efficiently”. A former Treasury official said this could be a necessary lesson in an era of monetary tightening.
To be sure, Kashkari acknowledged that the Fed’s interest rate hikes won’t slow down hyperscalers “all that much.” but, goldman sachs Pimco alumni said these changes in borrowing costs could also have beneficial effects in other areas of the economy.
