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Santos Sits Down with Federal Reserve Bank of Minneapolis President
Michigan Ag Connection - 12/07/2022

Inflation and the economy--arguably two of the most important issues in the United States today. These are also two topics that many think they know everything about, but unless you're an economics professor, banker or economist, there is likely still much to learn

Joe Santos, director of South Dakota State University's Ness School of Management and Economics where he leads the Dykhouse Program in Money, Banking and Regulation, sat down with Neel Kashkari, president and CEO of the Federal Reserve Bank of Minneapolis, to fill in some knowledge gaps and discuss inflation, the economy and the Federal Reserve's role in the economy as part of the Dykhouse Speakers Series. Kashkari also took questions from the audience.

The Federal Reserve (Fed) is the U.S.'s central bank. It was created in 1913 by Congress to manage the ups and downs of the economy. To ensure that the different regions across the country had a voice in monetary policymaking, the Fed set up 12 independent Federal Reserve Banks. The ninth of those banks is the Federal Reserve Bank of Minneapolis (Minneapolis Fed).

"Our job is to represent the region," Kashkari said. "That's Minnesota, North and South Dakota, Montana, part of Michigan and part of Wisconsin. A big part of my job is to travel around this region with my colleagues to understand what is happening in our regional economy."

Every six weeks, the Fed hosts the Federal Open Market Committee meeting in which representatives from each region meet and discuss the national economy. During those meetings, Kashkari's job is to represent the people of the Minneapolis Fed region. The next FOMC meeting is scheduled for mid-December in Washington, D.C.

"We cannot set a different interest rate for South Dakota and California because we all use the same currency--we use the same dollar," Kashkari explained. "We have to pick an interest rate, a monetary policy, that's right for the country as a whole. But part of my job is to make sure that you are represented in that deliberative process so we can come up with the best monetary policy for the nation as a whole."

Inflation is, arguably, one of the biggest issues in the U.S. right now. While the inflation rate of 7.7% (October's rate) is down from the near 40-year highs from earlier this year, the increased price of goods has created challenges for many Americans. On a basic level, where does inflation come from?

"It comes from more demand for goods and services than there is supply of goods and services," Kashkari said.

The Federal Reserve Act mandates that the Fed conduct monetary policy "so as to promote the goals of maximum employment, stable prices and moderate long-term interest rates."

The dual mandate, as it is known as, guides the Fed in its decision making to maintain low and stable inflation, price stability and full employment. As Santos asked, why is the dual mandate important, and how is it used to operationalize monetary policy?

"We've got maximum employment and stable prices--the way we think about it is we typically say those two goals are like sides of a seesaw," Kashkari explained. "When the economy gets strong and the unemployment rate drops, people find jobs, which is a really good thing. Businesses then have to compete to find workers, they end up having to pay more wages, and then that leads to more inflation. When the unemployment rate goes down, you could think the inflation rate goes up on the other side of the seesaw. In that environment, the Federal Reserve would tend to raise interest rates to cool the economy down and bring it back into balance. That's how we think about it typically working."

The current situation, in terms of the economy and inflation, is atypical. While unemployment has reach near historical lows, inflation is high and is being driven by atypical factors.

"The inflation we are experiencing is not driven by wages," Kashkari said. "(The cause) has been things like supply chains that were screwed up and continue to be screwed up, because of COVID."

Other causes of today's inflation include much of the stimulus that was put in the economy, in response to the pandemic, and the Russian invasion of Ukraine.

"You saw oil prices and commodity prices skyrocket," Kashkari said. "A bunch of different factors hit the economy, outside of the normal channel that we think about, which is through the labor market."

Wages are starting to climb in the U.S., but that is in response to inflation, Kashkari said.

"This is a challenge for us because our traditional models for analyzing the economy are not working very well right now because the source of inflation are these other sources, rather than the primary source that we think about associated with our dual mandate," Kashkari explained.

Circling back to the basic cause of inflation--more demand for goods and services than there is supply--Kashkari explained that a labor shortage, due to COVID, is hampering the U.S. economy's potential to supply goods and services.

The U.S. lost more than 1 million people due to the worldwide pandemic. While those who died tended to skew to the older generations, some of them were still of working age. Further, many people retired early due to COVID, and many have had challenges finding child care or have had to care for other family members--all of which have contributed to a smaller labor pool which has directly affected the economy.

"Our economy's potential is lower today than we thought it would be because of the pandemic," Kashkari said. "We have to factor than in when we think about inflation."

The more Americans who are gainfully employed and contributing to the economy, the bigger the economy's potential is, Kashkari said.

"Because we are missing all these workers, our economy's potential to supply goods and services is lower than it otherwise would have been," Kashkari explained. "Our job at the Federal Reserve is to bring that demand down to balance with that lower level of supply."

The Fed is working to bring the inflation rate down to 2%, and financial markets seem to believe it will fall toward that goal, Kashkari said.

"I know that we are going to do what we need to do to bring inflation back down," Kashkari said. "Once we get inflation back down, I would expect interest rates at that point to go back to more normalized, lower levels."

There are a lot of mixed signals in the economy right now, Kashkari said. In the first half of this year, a lot of workers were hired, but there was negative GDP growth. This assumes that more workers are producing less.

"Now, I don't actually believe that we are forgetting how to produce things. I don't believe that we're getting dumber on how to produce things," Kashkari said. "But we are seeing in a tight labor market that companies are embracing technology because they have to."

For example, fast food companies are having customers order and hotels are having people check in through kiosks. Both are examples of how companies are adopting technology to try and solve labor scarcity issues, Kashkari said.

When asked about cryptocurrencies, Kashkari explained that he has been vocally skeptical about digital currencies for several years.

"The fatal flaw in cryptocurrencies is that bitcoin can claim there only going to be X million bitcoins ever mined, but nothing stops me from creating 'Neel coin' and Joe from creating 'Joe coin,'" Kashkari said. "There have been thousands of these coins that have now been created, that are hard to distinguish. So, it's kind of the wild, wild west and chaos all rolled into one. I'm not ruling out the possibility that something useful could come out of this sector. But so far, I haven't seen it."

Finally, Kashkari provided some career advice to the audience, many of whom were students.

"Life is long--figure out what's important to you and go for it," Kashkari said.

To watch the interview, go to

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