Neel Kashkari, the president of the Minneapolis Federal Reserve Bank, stated that he supports the Federal Reserve’s decision to lower interest rates this week and has included two more rate cuts in his personal forecast for this year.

“I believe the risk of a significant rise in the unemployment rate is enough to prompt the committee to take action to support the labor market,” Kashkari wrote in an article published on the Federal Reserve’s website on Friday.

Federal Reserve officials lowered interest rates by 25 basis points at Wednesday’s meeting, marking the first rate cut since December of last year, citing the need to support a more fragile job market.

The head of the Minneapolis Federal Reserve does not have a vote on monetary policy this year but participates in discussions of the Federal Open Market Committee (FOMC). Previously, he anticipated that two rate cuts throughout the year 2025 would be sufficient. The Federal Reserve will also hold policy meetings in October and December this year.

Kashkari added that the Federal Reserve should not “preset a predetermined path of rate cuts.” If the labor market appears to be more resilient than it currently seems, or if inflation rises, he would support holding steady; if the economic situation requires it, he would even consider raising rates.

In recent months, the growth of employment in the United States has noticeably slowed down, with the unemployment rate rising to 4.3% in August, the highest since 2021. Kashkari stated that although the sharp decline in immigration has lowered the necessary employment balance growth rate to match population and labor force growth, this can probably only explain one-third to half of the decline in job creation.

He stated that, at present, the risk of a further rapid deterioration in the labor market may be greater than the risk of inflation significantly exceeding expectations. He also pointed out that a more likely scenario is that inflation remains close to the current level—above the Federal Reserve’s 2% target—rather than accelerating significantly.

Neutral interest rate

Kashkari raised his estimate of the neutral interest rate to 3.1%. He stated that this rate level, which neither suppresses nor stimulates the economy, may rise in the coming years due to various factors, including the shift of investments towards more efficient industries (such as artificial intelligence and other technologies) and tariffs increasing the cost of overseas capital.

Kashkari has written multiple articles discussing neutral interest rates over the past few years. He stated, “From this perspective, monetary policy may not be particularly tight. Even if the FOMC initiates multiple rate cuts, long-term interest rates may not decrease by the corresponding amount.” He pointed out that over the past year, some credit rates have not responded much to policy changes, even though the Federal Reserve has cumulatively lowered the benchmark interest rate by a full percentage point in the last few months of 2024.

He believes this could also spill over into other parts of the economy. “The housing market may not actually get much relief from rate cuts,” Kashkari said.

He also noted that political interference could undermine the Federal Reserve’s independence and weaken confidence in the central bank’s ability to control inflation.

Kashkari stated that he believes the FOMC is firmly committed to bringing inflation down to its target, but acknowledged that addressing threats to the Fed’s independence is “beyond the FOMC’s control.”