Fed's Kashkari says inflation fight takes priority as labor market is 'in decent shape'

Minneapolis Federal Reserve President Neel Kashkari reiterated on Thursday that reducing inflation in the U.S. remains his foremost objective, cautioning that consumer prices continue to be excessively high.

During an interview with CNBC's Kaori Enjoji at the Bank of Japan-IMES Conference, Kashkari emphasized that the U.S. central bank would maintain a "balanced approach" in addressing its dual mandate, which encompasses both price stability and full employment.

He remarked that inflation has consistently exceeded the Federal Reserve's 2% target for over five years, while concurrently acknowledging that the labor market is currently in "decent shape."

"My emphasis is firmly on inflation. While I do not overlook the labor market, it is critical to address both factors; presently, the labor market is stable, whereas inflation levels remain excessively high," he stated.

Kashkari warned that prolonged elevated inflation poses an increasing risk of inflation expectations becoming unanchored and rising further.

"Should that occur, our response would need to be even more aggressive, making it imperative that we take necessary measures to keep inflation expectations in check," he explained.

Currently, U.S. headline inflation is reported at 3.8% as of April. When excluding food and energy, the core Consumer Price Index (CPI) exhibited an increase of 0.4%, resulting in a total of 2.8%.

Kashkari noted that global inflationary pressures have been influenced by several factors, including the Covid-19 pandemic, tariffs, the conflict in Ukraine, and now, the ongoing issues in Iran.

When asked about the key contributors to the recent surge in inflation, Kashkari identified "some tailwind from previous factors," but primarily attributed the current surge to rising energy and fertilizer prices.

"These inputs also have an impact on other categories, thus I will be monitoring when energy prices begin to exert influence on the broader economy and inflation overall," he remarked.

AI and the Fed

In response to queries regarding the effects of artificial intelligence (AI) on the Federal Reserve's policy direction, Kashkari suggested that should AI lead to sustainably higher productivity, it may allow for higher interest rates to be maintained due to the economy's increased efficiency.

However, he also expressed caution given the difficulty in assessing the impact at this stage, indicating that it would require closer observation to understand how AI translates into sustained productivity gains.

"I engage with numerous businesses regularly, particularly large firms in America. They consistently report that they are utilizing AI effectively, enhancing productivity or acquiring capabilities that were previously unavailable," he noted.

"I am optimistic about AI's long-term potential, but the short-term effects on monetary policy, or even its long-term implications, remain uncertain at this point."