Street Calls of the Week
Investing.com -- Federal Reserve Bank of Minneapolis President Neel Kashkari expressed concern about a weakening labor market while explaining his support for the recent interest rate cut in an essay published Friday.
Kashkari pointed to four consecutive weak payroll employment reports, noting that while reduced immigration explains part of this trend, Minneapolis Fed economists estimate it accounts for only one-third to one-half of the decline in job creation. He identified weak labor demand as another likely factor.
"The labor market appears to be weakening," Kashkari wrote, highlighting moderating nominal wage growth as further evidence of cooling conditions.
Kashkari contrasted labor market weakness with exuberant financial markets, noting that equity indices including the Russell 2000 are near all-time highs, while speculative assets like bitcoin and meme stocks have regained popularity. Credit spreads have also compressed to historically low levels.
To reconcile these conflicting signals, Kashkari offered several explanations, including the possibility that the neutral interest rate (R*) may be higher than previously thought. He suggested capital might be shifting from labor-intensive industries toward technology sectors that require fewer workers.
"Technology is driving rapid growth of industries that don’t require as much labor, resulting in a booming stock market and sluggish hiring environment," he explained.
Regarding inflation risks, Kashkari expressed confidence that long-term inflation expectations remain anchored despite inflation hovering near 3%. He considered a wage-price spiral unlikely given the weakening labor market and declining wage growth.
Looking ahead, Kashkari believes a rapid further weakening of the labor market is more likely than a significant inflation surge. While tariff uncertainties could keep inflation around 3% for a year or two, he finds it "hard to see inflation climbing much higher than 3%" given announced tariff rates and the relatively small share of imported goods in U.S. consumption.
These assessments led Kashkari to support the recent rate cut. He increased his projection from two to three 25-basis-point cuts this year while also raising his estimate of the long-run equilibrium federal funds rate to 3.1%.
Despite supporting rate cuts, Kashkari emphasized that the Fed "should not be on a preset course" and should remain flexible based on incoming economic data.