Neel Kashkari, president of the Federal Reserve, has dismissed the latest inflation figures, despite their coming in below expectations. He made the remarks in an interview with CNBC’s Steve Liesman, Kashkari insisted that price growth remains a problem despite the August personal consumption expenditures price index coming in below economists’, where he was asked about his forecasts.
Kashkari’s Inflation Position
Kashkari spoke as part of a Council on Foreign Relations event in New York. His remarks follow Wednesday morning’s release of the August personal consumption expenditures price index, which is the Fed’s preferred measure of inflation. The core version of the index, which strips out volatile food and energy prices, came in at 3% on an annual basis — below what economists had forecast.
“There are many different measures of inflation, but it’s running at around a 3% rate,” Kashkari said. “It’s been elevated now for more than five years.”
The data released Wednesday on consumer spending and gross domestic product were cited as evidence that the economy was, in his words, “resilient.”.
Labor Market Picture
Kashkari described the job market as “pretty good” but not “great.”
On Wednesday, the management services company ADP reported that private payrolls grew beyond what economists had projected for September.
The Cost of Inflation
Kashkari said a conversation with a labor union leader a few years ago shaped his view of the trade-offs between price stability and employment. The union leader told him that inflation was “worse” than a recession for their members.
The dialogue shaped Kashkari’s understanding of the trade-off between steady prices and a robust labor market.
Interest Rates and AI Investment
This month, the Federal Reserve raised interest rates for the first time in three years, with the goal of bringing prices back in line with its target. The central bank has also indicated that another rate hike may be coming soon.
The economy’s resilience through a series of shocks in recent years has prompted Kashkari to increase his projection for the neutral funds rate, which now stands at 3.25%. He argued that the neutral rate is likely to remain elevated temporarily because of strong demand for investment capital during the artificial intelligence boom.
Kashkari said the AI buildout could boost productivity across the U.S. economy if it works. He also expressed worries that corporate spending may either miss its target or take longer than expected to show results, with either outcome potentially dragging on the wider economy.
“The fruits have not yet borne out,” Kashkari said. “If this ends up being massive investment that is not nearly as productivity enhancing as we assume, then this will have been malinvestment, and then there could be big economic consequences for the economy writ large.”
Efficiency Warning
Kashkari said the AI industry may need to learn to be more “efficient” with money and resources. The former Treasury Department official said that could become a necessary lesson in an era with tighter monetary policy.
Kashkari did admit that the Fed’s interest rate increases might not rein in hyperscalers by “much.”, though he argued they could still help other parts of the economy.
Key Facts
- Core PCE index: 3% annual increase in August
- Core PCE forecast: Above 3%
- Neutral funds rate estimate: 3.25%
- ADP private payrolls: Expanded more than forecast in September
Kashkari is advancing two distinct arguments, and each one merits serious consideration instead of hasty rejection. His point on inflation is that the newest data has not altered his view that prices remain too high, despite the August figures coming in lower than forecast. That stance holds up well.
He is raising an alarm about firms investing heavily in AI without securing the productivity benefits they claim. It is a fair worry, yet it remains a gamble — the results of today’s spending will take years to surface.
Source material: “Fed's Kashkari says inflation is 'still too high' even after softer-than-expected PCE data, labor market is 'pretty good',” CNBC.
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