MICHEL MARTIN, HOST:
For more on what the consumer price index numbers might reveal, Neel Kashkari is on the line. He is president and CEO of the Federal Reserve Bank of Minneapolis and one of the voting members on the Fed committee that sets interest rates. Good morning. Thanks so much for joining us.
NEEL KASHKARI: Good morning. Thanks for having me.
MARTIN: So everybody will obviously be paying attention to that headline inflation number for April, but are there any other statistics that you and other Fed governors are waiting for?
KASHKARI: The other big one that gets a lot of attention that we focus on is what we call core inflation, where you strip out food and energy just because they're volatile. It's not that they don't matter to the American people, but they move around a lot. But as Scott was saying in there, you know, just a moment ago, what happens in energy prices tends to affect other categories. So, for example, plastics. Plastics come from oil and petroleum. Eventually, high energy prices bleed into just about everything else. So we look at both core inflation and headline inflation as signals of what's happening in the economy.
MARTIN: Do you have any expectations for that number?
KASHKARI: I think there's going to be an increase in core relative to last month. I'd be surprised if it's a big increase because the oil shock is still so recent, but it's also something that's been moving down slowly even before the Iran war happened. You know, inflation was too high before we invaded Iran, and now the war has sent this shock wave that's really complicated the inflation outlook.
MARTIN: You agreed with the Fed's recent decision to keep interest rates where they are, but you dissented from the language the Fed used to describe what it might do next. This is what you wrote. You wrote...
(Reading) I consider this language a form of forward guidance about the likely direction for monetary policy. Given recent economic and geopolitical developments and the high level of uncertainty about the outlook, I do not believe such forward guidance is appropriate at this time. Instead, the FMOC should offer a policy outlook that signals that the next rate change could be either a cut or a hike, depending on how the economy evolves.
Can you say more about that?
KASHKARI: Yes. The reason these kind of words in a monetary policy statement matter is because they can affect financial markets. And up until - including - this last report, we signaled that the likely next move is down, and that means that financial conditions will be a little bit frothier than they otherwise would be. So I argued and a couple of my other colleagues argued, hey. It isn't appropriate, given the uncertainty around what's happening in the Middle East, to continue signaling that the next move is likely down. If the Strait of Hormuz is closed for an extended period of time, the next move may well be up. We just don't know right now. So let's take that bias out of our guidance to the markets.
MARTIN: Is the war the main factor in creating that uncertainty?
KASHKARI: It is. I think before the war in Iran happened, before it started, I felt pretty confident that inflation was slowly headed back down towards our 2% target. And we can walk you through why, but I felt pretty good about that. It'll take a while, but we're heading in the right direction. The war has really upended that. And now there's so much uncertainty about how long the strait is going to be closed, it makes it very difficult for us to forecast the future.
MARTIN: And given everything you just said, though, I'm just wondering. The president keeps saying that this is coming to a close quickly, but what if it's not?
KASHKARI: Yes. If it's not, then I think the, you know, oil will be disrupted for an extended period of time. Already when - you know, when Russia invaded Ukraine a few years ago, that sent a shock wave, an energy shock wave around the world that absolutely pushed up inflation here at home. By some measures, the Iran war oil shock wave is equally as big or even bigger than the Ukraine war shock wave. And so if it's an extended period of time, then I think it really could create a challenging inflation environment not just for the American people, but also for us at the central bank to try to deal with it.
MARTIN: And I'm not sure if you feel comfortable answering this. But I know this is the question a lot of people have on their minds, which is, what would you have to see to consider cutting interest rates?
KASHKARI: Well, I think if the Strait of Hormuz opened quickly, then that would give us confidence that the oil price shock would probably be somewhat short-lived. If, on the other hand, we also saw a real weakening in the labor market - the labor market is still hanging in there with a 4.3% unemployment rate. If that started to move in a negative direction, that could change the calculus. And we have to figure out, is the bigger risk the labor market or is the bigger risk higher inflation?
MARTIN: Before we let you go - only 30 seconds left here - but are there any bright spots in the current economy? Anything that people - we might not be thinking about that's a sign of strength?
KASHKARI: Overall, absent this shock wave, the fundamentals of the U.S. economy are quite good. Corporations are doing well. The data center buildout continues to drive a lot of economic growth in America. We're in a strong position otherwise.
MARTIN: That is Neel Kashkari. He's president and CEO of the Federal Reserve Bank of Minneapolis. Mr. President, thanks so much for joining us.
KASHKARI: Thank you for having me. Transcript provided by NPR, Copyright NPR.
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