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There’s been a lot of talk over the past few weeks about the economy and a word that keeps coming up is ... uncertainty.  

President Donald Trump’s changing tariff policies have made it difficult for businesses and consumers to plan. Stock markets here and abroad have plunged and then recovered some ground and then dropped again. 

Many of us have questions about what’s happening and how the uncertainty could affect prices, our jobs and savings.   

MPR News host Angela Davis talks about the economy with Neel Kashkari, the president and chief executive officer of the Federal Reserve Bank of Minneapolis. 

Later in the hour, she talks with a financial advisor, Ross Levin, about how to manage your money during stock market swings and an unsettled job market.  

The following is a transcript of the podcast with Angela Davis, Neel Kashkari and Chris Farrell, lightly edited for clarity. Listen to the full conversation, along with a discussion with Ross Levin, by using the audio player above.

 Neel, you heard me use the word uncertain to describe the economy right now. Does that line up really with what you're seeing and hearing as you talk to people? And if that is the right term, is there harm that can simply come from uncertainty?

 It’s the exact correct term. The last two months has been the most dramatic downturn and upturn in uncertainty that I’ve experienced in the 10 years I’ve been at the Fed, except for March 2020, when COVID hit. And why it matters so much is because businesses and consumers don’t know where this where this is all going to end up, and when is it going to end up. 

So if you’re a business and you're thinking about investing to build a new factory, well are you going to be sourcing your supplies from China, from Mexico, locally. How much you going to be paying for those how profitable is your enterprise going to end up being that the businesses that I talk to say we’re basically on hold until we know how this is going to shake out. 

And if everybody is nervous at the same time, and everybody pulls back, that itself can bring the economy down just because people are uncertain.

 Chris, you've described it as we’re all frozen?

 Particularly when you look at the labor market, do you hire people and people don't want to leave their jobs because there's so much uncertainty. But I’m curious, how do you analyze what might be the economic impact of tariffs when we haven’t seen tariff levels like this for more than a century. I mean, the Federal Reserve has this toolkit. They may make mistakes, may stumble, but there's a toolkit about a banking crisis. There's a toolkit about higher inflation, but tariffs?

 Tariffs are really hard for any central bank, because tariffs push up prices and push down economic activity. So if you are a consumer or a business, and you’re used to buying something for $1 and now it's going to cost more, you're going to buy less of that thing. So it's going to push up prices and push down the economy. 

Now we can analyze that by itself. The part that's tricky is because we've had four years of high inflation. Is this a one-time adjustment in prices up, or does this lead to something more ongoing? 

And then back to what Angela talked about, where she started with the uncertainty. That's a separate we call it channel. That’s a separate way tariffs affect the economy, and that is much harder to analyze with any confidence, because it’s collectively how do we all feel and we might feel dreadful, we might feel wonderful. How do you quantify that? That’s really challenging for analysts.

 The timing of it. I mean, I think many people already felt like I’m tired, I’m struggling back in 2022 I did a talk show about how prices were shooting up for everything from groceries to gasoline. Inflation has calmed down in the years since then. But how do you describe what we’re seeing right now, in this moment with inflation?

Well, the underlying inflationary dynamics have been quite positive. The last year, inflation has been coming down. That doesn’t mean prices have been coming down. It just means prices were growing more slowly than they were in the past. 

So we’ve tried to get back to our 2 percent inflation target. Inflation is running somewhere around two and a half, 2.75 percent so we’re not all the way there, but we’ve made a lot of progress in the past couple years, but that's before the effects of tariffs in the trade war, and that really is potentially changing the game, depending how long this goes on.

 How are you looking at the bond market? There was a disconcerting moment where, okay, so those stocks are going down, and you would expect that the 10 year treasury yield would have also gone down, flight to safety. I don’t know what’s going on with the stock market, so put my money in U.S. Treasuries, but the yield on U.S. Treasuries also went up, and that seemed to bring a lot of people on Wall Street, sort of like, what's going on here?

You described it correctly, but I would argue it should not have. It should not have been that surprising, because if we go back to the fundamentals, why have we had a trade deficit for 40 years? And this is just economic math. 

Any country where investors around the world say that is the best country to invest in, we all want to invest there, the math works out that the result of all of that investment is that country will have a trade deficit. So America was exceptional. We also talk about American exceptionalism that would manifest itself in we would have a trade deficit, but would also have lower interest rates across the economy. 

So now, if the goal is to no longer have a trade deficit, then investors must conclude there are other good places to invest too. Less capital would flow into our country, and interest rates would be higher. And so to me, it's actually not that surprising. It is actually an outcome of if we want to reduce the trade deficit, less money is going to flow into America, and that means interest rates are going to be higher.

 What role does the Federal Reserve play in all of this, and what tools does it have to try to help out or to respond to inflation?

 Inflation is one of our primary jobs. We have what we call a dual mandate of stable prices, 2 percent inflation and maximum employment. We can manage some of the short term ups and downs in the economy. But if the economy now is going to reset to a new normal, new global trade dynamics. Whatever that new normal is, we actually the Fed cannot affect, that we cannot change that, we can simply keep inflation under control as we transition to that new normal. 

Chris, you talked about the bond market, whether the new normal for Treasury yields is 4 percent or 5 percent or something else, I don't know the answer to that, and we have no ability to shape that. But we can help keep inflation in check on the way to that new normal.

 You may not be able to answer this, but does it appear the Fed will change interest rates? Could you talk broadly about what you're thinking about as far as interest rates in this new economic reality?

 The uncertainty created by the tariffs, for me, has put us on hold for a while in terms of interest rates. Because on one hand, inflation is being pushed up, and we're already at a higher level. We're already higher than we want it to be, and now inflation is being pushed up. We have to make sure that that is only a one-time effect, that it's not a longer-term effect. So I would be quite cautious as an individual policy maker about cutting interest rates when inflation is heading back up. So personally, I think we're going to be on hold for a while.

 A lot of business leaders, a lot of organizations, small businesses, they talk to you and you travel around, what are you hearing about? The job market? There's a lot of confusing information. It's kind of hard to get a sense of what's really going on here.

 Well, overall, the unemployment rate is low, and nationally, it's around 4.2 percent. It's a good place to be, but I'm not seeing a lot of new hiring when I talk to businesses. You know, you said this earlier, Chris, businesses are mostly on hold. Saying, “Yeah, I'd like to hire a few more people, but I'm a little nervous right now.” 

Now, the good news is I haven't seen evidence yet of any widespread layoffs. It's like people are on hold. I don't want to hire more people. I don't want to let my workforce go. I'm just going to buckle down for a while and see where this all settles. Now, if you know the administration is talking about active negotiations with other countries, if there are some quick resolutions with our major trading partners, then hopefully this uncertainty can be lifted quickly. But for now, we're just in a wait and see mode.

Question from caller, Nick from Minnetonka:

 There's been a lot of talk about prices going up because of tariffs and trade moving around and all sorts of things. I'm wondering if Neil or Chris can talk about when that might happen? Just curious about timing.

know, in some cases, it's already happening. So we saw some evidence that, because there was a lot of discussion that tariffs were coming, that some businesses started buying a lot of stuff from abroad ahead of the tariffs, pushing up prices for those very goods in advance. 

We've also seen some evidence of businesses saying, I know tariffs are coming. I'm going to start raising prices now to protect my business, to protect my margins. So I think it's going to take time to flow all the way through the economy, but there is some evidence that it's already taking place right now.

 Chris, have you noticed any price increases?

 Yes, and I think that actually, we're trying to look ahead, but some of the backward looking numbers, just for what you're talking are actually going to look pretty good, because people are been adding to their inventories, and it looks like sales are going pretty good too, because people are going, “Well, it may be a slightly higher price now, but what's it going to be six months from now?”

 Neel, how worried are you about a recession? And if you’re not worried, what would have to change to make you worry about a recession?

There's no question that the risk of recession has increased a lot in the last few months, but it really depends now on is there going to be quick resolution to some of these negotiations.

Timing matters. If the resolution is quick with our major trading partners, then hopefully this uncertainty can be put behind us. If it takes a lot longer, then the uncertainty is going to be with us, and the longer the uncertainty is with us, the higher the risk of recession.

And this timing has to do with President Trump putting out a call to negotiate tariffs with leaders of other countries?

Yes, they've announced that they're in deep negotiations with many of our trading partners, and the sooner those are resolved, I think the sooner this uncertainty can be lifted.

 I've always been a little bit skeptical of the consumer confidence numbers — how much they really matter — but the downward movement about the measures of consumer confidence have really been dramatic. So what is consumer confidence, and when you look at these numbers, how do you analyze them? How do you put them in a context?

I look at them the same way you do, which is, it's hard to quantify one for one, this level of consumer confidence means this much of GDP, but it's the trend that affects it. And when you see you know, even people who don't own stocks, the stock market gets a lot of attention. 

So when you see the stock market falling, people take notice of that. It gets it's in all the headlines. Everybody's reporting on it, whether or not somebody has a 401K, they see that, you know? So it's one of the things that affects consumer behavior. It affects whether someone says hey, I'm going to take my family to Disney World, whether or not we're going to go out to eat. And it affects businesses whether or not they want to invest or hire those extra workers.

 To be clear, when we say consumer confidence, we're talking about whether or not people are spending less?

It's just how people are feeling. So there are surveys that are done to ask consumers, “are you confident about the future of the economy?” If people are more confident and feeling more optimistic about their own job prospects, they're more likely to go out and spend more, maybe dip into their savings, if they're nervous, then they cut back.

When people put off their purchases, how does that affect the economy?

If we all put off our purchases at the same time, even just a little bit, then we're all going to spend a little bit less. Restaurants are going to be less crowded. Shopping malls are going to see less traffic. And all of this adds up. It may feel like a raindrop, but a lot of raindrops can add up to a lot of water collecting on the street. So it actually makes a big difference how we all feel.

 I'm curious. We just went through, you know, this bout of inflation couple years ago. Now, inflation is coming down, getting closer to target range. What did you learn? Or did you learn about the impact of monetary policy on the economy?

Part of what I'm thinking about, there was a lot of forecasts [[that said]] the only way the Fed could bring down inflation was high unemployment, rising unemployment. That didn't happen.

So as we're looking ahead with all this uncertainty, are there lessons that you've drawn from, are the recent experience that you're using now?

It is, so the inflation that was the Fed can affect overall demand in the economy, but what brought the inflation down the last few years was more on the supply side of the economy. The supply side healing, supply chains healing. I mean, I'm pleased that monetary policy played a role. But most of the heavy lifting in bringing inflation down was not monetary policy. That's why we were able to see the job market remain as robust as it was. The economy and businesses and workers did the heavy lifting for us. 

It's just a reminder of the limited tools we have, and our tools work in certain situations much more powerfully than in others, and we do not have the tools to undo the economic effects of tariffs in a trade war. We can just keep inflation from getting out of control, but we cannot undo what, what the tariffs and trade war do to the U.S. economy.

Listen to the full conversation, as well as a conversation with financial advisor Ross Levin, by using the audio player above.

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Use the audio player above to listen to the full conversation.

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MPR News host Angela Davis talks with Neel Kashkari, president and CEO of the Federal Reserve Bank of Minneapolis, about tariffs, inflation, the job market and responding to an uncertain economy. 

MPR News with Angela Davis -MPR News host Angela Davis talks with Neel Kashkari, president and CEO of the Federal Reserve Bank of Minneapolis, about tariffs, inflation, the job market and responding to an uncertain economy. 

How tariff uncertainty affects the economy and your money

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How tariff uncertainty affects the economy and your money

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