Federal Reserve Kashkari: Interest rates may be close to a neutral level, and economic resilience exceeds expectations

The Zhitong Finance App learned that Federal Reserve Bank of Minneapolis Governor Neil Kashkari said that interest rates may now be close to a neutral level for the US economy, and future actions will depend on economic data released one after another.

Kashkari, who regained the right to vote on the Federal Reserve's policy this year, said on Monday: “Over the past few years, we have always thought the economy will slow down, but the economic performance is far more resilient than I expected.” This tells me, um, monetary policy definitely did not exert that much downward pressure on the economy. I'm guessing we're probably pretty close to neutral now.”

Federal Reserve officials have hinted that interest rates are likely to remain unchanged this month after cutting interest rates three times in a row at the end of 2025. According to the minutes of last month's meeting released on December 30, most Federal Reserve officials believe that as inflation falls, further interest rate cuts will eventually be needed, but there are differences on when to cut interest rates and the extent of interest rate cuts.

Economic data released since the Federal Reserve's December meeting showed that the unemployment rate rose to 4.6% in November, the highest level since 2021, while consumer price increases were lower than expected, which supported lower interest rates. However, the US economy also expanded at its fastest pace in two years in the third quarter, heightening concerns that inflation may rise again.

Kashkari said, “We just need to get more data to see which factor has the biggest impact, inflation or the labor market. Then we can start from a neutral standpoint and act in the necessary direction.”

He said, “The risk of inflation lies in its persistence. The effects of tariffs may take years to fully spread to the entire economic system, and I think there is indeed a risk that the unemployment rate will suddenly rise from its current level.”

Meanwhile, yesterday, Philadelphia Federal Reserve Chairman Anna Paulson (Anna Paulson) said that it may be appropriate to cut interest rates further by a small margin in late 2026, but this outlook depends on whether the economic situation remains moderate and favorable.

Paulson said, “I see that inflation is cooling down and the labor market is stabilizing. The economic growth rate this year is about 2%. If all of these conditions are realized, then it may be appropriate to make some gentle further adjustments to the federal funds rate later this year.”

Over the weekend, a group of well-known economists said that the long-term risks posed by growing federal debt are the top issues facing the US economy, including a scenario where the size of debt may cause the Federal Reserve to keep interest rates low in order to minimize debt repayment costs rather than curb inflation.

This concept is known as “fiscal dominance”. Former Treasury Secretary and Federal Reserve Chairman Janet Yellen mentioned that “the preconditions for fiscal dominance are clearly being strengthened” and that Donald Trump has “publicly asked” the Federal Reserve to clearly lower interest rates to reduce the government's debt service costs.