Minneapolis Federal Reserve President Neel Kashkari said Monday he expects policymakers to slow the pace of rate cuts after last week’s half-percentage point cut.
“I think we’re still in a net tight spot after 50 basis points,” Kashkari said in a CNBC “Squawk Box” interview. “So I felt comfortable taking a bigger first step, and as we move forward, I expect that on balance we will probably take smaller steps unless the data changes materially.”
In a decision that was at least a mild surprise, the rate-setting Federal Open Market Committee voted Wednesday to cut the overnight rate by half a percentage point, or 50 basis points. It was the first time the commission has made such cuts since the early days of the Covid pandemic and, before that, the 2008 financial crisis. One basis point is equal to 0.01%.
While the move was unusual from a historical perspective, Kashkari said he saw it as necessary to get interest rates to reflect a policy recalibration from a focus on overheating inflation to more concerns about a weakening labor market.
His comments indicate the central bank could return to more traditional moves in quarter-point increments.
“Right now, we still have a strong, healthy labor market. But I want to keep it a strong, healthy labor market, and a lot of the recent inflation data looks very positive and that we are on our way back to 2%,” he said.
“So I don’t think you’re going to find anyone at the Federal Reserve who declares mission accomplished, but we do pay attention to what risks are most likely to materialize in the near future,” he said.
As part of the committee’s rotation schedule, Kashkari won’t have a voice on the FOMC until 2026, although he will have a say in policy meetings.
Wednesday’s rate cut indicated that the Fed is on track to normalize rates and return them to a “neutral” position that neither stimulates nor limits growth. In their latest economic projections, FOMC members indicated the rate is likely around 2.9%; the current fed funds rate is between 4.75% and 5%.
Atlanta Fed President Raphael Bostic said separately Monday that he expects the Fed to move aggressively to return to neutral interest rates.
“The progress on inflation and the cooling of the labor market has happened much faster than I expected at the beginning of the summer,” said Bostic, who is voting for the FOMC this year. “At this point, I foresee normalizing monetary policy sooner than I thought appropriate just a few months ago.”
Bostic also noted that Wednesday’s rate cut puts the Fed in a better policy position, in that it can slow the pace of easing if inflation starts to rise again, or accelerate it if the labor market slows further.
Market prices assume a relatively equal chance that the FOMC will make cuts of a quarter or half a percentage point at its November meeting, with a greater likelihood of a bigger move in December, for a total of 0.75 percentage points of further cuts at the end of the year, according to that of the CME Group FedWatch unit of measurement.