Why Crisis-Tested Fed Official Neel Kashkari Doesn’t See Imminent Rate Cuts

Markets are in crisis trying to sort out extreme economic uncertainty born from extreme trade policy uncertainty (see chart). Minneapolis Fed president Neel Kashkari is a market crisis expert — he ran the 2008 crisis-response TARP program for Treasury chief Hank Paulson — and just said the Fed is less likely to cut rates to manage this trade war crisis. Here’s the key excerpt from his essay today:

Given the paramount importance of keeping long-run inflation expectations anchored and the likely boost to near-term inflation from tariffs, the bar for cutting rates even in the face of a weakening economy and potentially increased unemployment is higher.

This is a fancy way of saying that, for now, controlling tariff inflation risks are a bigger priority than recession.

The Fed has a dual mandate — and very tricky balancing act — of using its policies to accomplish maximum employment with the lowest possible inflation.

The Fed will use lower rate policy to stimulate a struggling economy to hit its maximum employment mandate. And they will use higher rate policy to preempt or squash inflation, as we’ve seen since 2022.

The crux with outsized tariffs is that they pose both inflation and recession risks.

The Fed will always take its punches for not doing enough — or acting fast enough — on either side of its dual mandate. But Kashkari seems to be setting up the argument — which I agree with — that inflation is tougher to squash once it takes hold.

Anyone looking at their expenses spike fast and come down much slower in recent years can relate to this.

Meanwhile, the market reaction when stocks sell off during a crisis is normally that bonds would benefit and rates come down.

But that’s not happening.

It happened at first, when the 10-year Note yield — a key benchmark for rates in the economy — dropped to 4% on April 4, which was 2 days after the Liberation Day tariff announcements. But today (April 9), the 10-year yield is back up to 4.4%.

Likewise, mortgage rates during this post-Liberation Day volatility went from 6.75% to 6.5%, and are now back up to nearly 7% as mortgage bonds sell.

Mortgage and Treasury bonds usually sell on inflation fears because inflation erodes future cash flows for investors.

Nobody knows how this will play out, but the bond market is usually the smart money, and it appears more worried about inflation than recession for now.

And the Fed definitely watches all of this closely.

Kashkari won’t rotate back into a voting role on the Fed’s rate setting body (the FOMC) until next year, but he’s in the room and part of the deliberations during the Fed’s 8 FOMC meetings this year.

And an essay like he wrote today is the evidence he’ll present during rate policy deliberations at the May 6-7 FOMC meeting.

So it’s worth reading, and is linked below. Please reach out with comments or questions.

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Reference:

– What Fed Actions Are Best Response To Trade War? (by Minneapolis Fed chief Neel Kashkari)