The odds of the U.S. avoiding a deep recession and achieving a "soft landing" are rising as the Federal Reserve tries to bring down inflation, but the economy isn’t out of the woods yet according to a key figure at the central bank.
Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, appeared on CBS’ "Face the Nation" Sunday and told host Margaret Brennan that he agrees with Fed economists who increasingly view the U.S. economy as likely to end this inflation cycle without a significant hit to the labor market.
"That’s our base case scenario, the economy continues to surprise how resilient it is, that’s a really good thing, as your reporting just showed the unemployment rate is still very low of 3.6%" Kashkari said.
"Nonetheless, I’m not going to dismiss the hardship that Americans are feeling. High inflation for several years has really put a dent in people’s pocketbooks. We’re now starting to dig our way out of that," he explained. "So, we’re making progress. But I’m also not surprised that people are still frustrated by how long it has taken to get here."
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Kashkari is one of the 12 Fed officials who serve as voting members of the Federal Open Market Committee, which makes decisions about the central bank’s monetary policies that influence interest rates, which in turn have an impact on the rates paid by credit card and mortgage borrowers.
When asked whether the Fed plans to raise interest rates one more time in 2023 given that inflation slowed to 3% on an annual basis in June – down from a 40-year high of 9.1% inflation the U.S. faced last year but still above the Fed’s 2% target – Kashkari said policymakers will weigh the data before making a decision.
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"We need to get inflation all the way back down to 2%. And while that headline number that your reporter just shared, 3%, is really positive news, that headline number tends to move around a lot, as oil prices and gas prices and food prices fluctuate the underlying number. The core numbers more around 4.1%, that’s down from around 5.5% a year ago," Kashkari noted.
"So we’re making good progress, but it’s still double our 2% rate, and so we don’t want to declare victory," he added. "If we need to hike – raise rates further from here, we will do so. But we’re gonna let the data guide us and not prejudge the outcome."
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Kashkari went on to say that although he thinks there will be some job losses coming to the U.S. economy as interest rates remain elevated, he believes it will be possible to have modest increases in the unemployment rate and still manage to pull off a "soft landing" that avoids a deep recession.
"I personally don’t think that’s realistic, that we’re going to end this inflation cycle with no cost to the labor market. It would not surprise me to see the unemployment rate tick up from 3.6 to 3.7, 3.8, maybe even 4%. That in my book – that would still be a soft landing," he said. "We definitely want to avoid a deep recession where you have hundreds of thousands of people losing their jobs month after month, the kind of painful recession that we have seen in the past. If we can achieve 2% inflation with only a modest softening in the labor market, I think that would be a resounding positive outcome for the country as a whole."
Last week, the Fed announced another hike to the benchmark federal funds rate to a range of 5.25% to 5.5% which will take interest rates to their highest level in 22 years. It was the Fed’s 11th rate hike since March 2022 when the central bank began its campaign of restrictive monetary policy aimed at tamping down inflation.
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Economic projections released following the central bank’s meeting in June show that a majority of Fed officials expect interest rates to reach 5.6% by the end of 2023, which suggests that at least one more quarter-point increase will occur this year.
The Fed is expected to meet three more times this year with meetings scheduled in September, November and December.
FOX Business’ Megan Henney contributed to this report.
