AI boom, stubborn inflation point to rate hike ahead, says Minneapolis Fed President
Minneapolis Fed President says he expects a rate hike this year
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Inflation has been too high for too long.
That was the central message of Minneapolis Federal Reserve Bank President Neel Kashkari’s statements at a Friday panel discussion at the Aspen Ideas Festival.
Joined on stage by two CEOs and an economics professor, Kashkari fielded a wide-ranging set of questions about affordability and confidence in the economy.
Here are three main takeaways.
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1) Kashkari expects a rate hike this year
Kashkari is currently serving a term on the Federal Open Market Committee, which sets the Fed’s benchmark interest rate.
In its most recent decision, it voted 12-0 to keep the rate steady. At the same time, it released a “dot plot” where Fed officials anonymously signal where they think the interest rate should head in the future.
Kashkari revealed Friday that he expects a hike before the end of the year, changing his mind from March’s dot plot, where he penciled in a rate cut. He said he’s informed by high inflation and uncertainty about the Iran War.
“I don't trust Iran to honor whatever agreement has been made,” he said. “There's some evidence overnight that they're already reneging on it, so I certainly am not seeing ‘all-clear’ coming out of the Middle East, and that makes me cautious about feeling too good that the worst is behind.”
Inflation has been above the Fed’s target rate of 2 percent for more than five years. The Federal Reserve’s preferred inflation measure rose to 4.1 percent in May, the highest it’s been in three years.
2) Data center and AI investments are fueling inflation, interest rates
The expansion of data centers is also causing upward pressure on prices and interest rates, Kashkari said.
“If we as a country are going to invest hundreds of billions of dollars in this new sector called data centers and AI, that capital comes from somewhere,” he said.
Kashkari echoed a statement he made at a St. Paul Area Chamber of Commerce event last month. The ongoing data center boom, which has been financed by companies borrowing heavily, raises the demand for capital. That raises interest rates and pulls capital away from less profitable projects, like, for instance, building housing.
That’s why, Kashkari said, bringing down mortgage rates isn’t as simple as the Fed cutting its benchmark interest rate. There are other factors at play, such as data centers.
“There's a higher return for the economy for that capital to build data centers than to build an apartment building,” he said. “So data centers (are) a big deal. It's having a near-term inflationary impact. It's probably pushing up interest rates across the economy now and for the next several years”
Kashkari said overall, he’s excited about artificial intelligence and that he’s not as worried about its impact on jobs as others are.
“I'm confident that there's going to be important roles for labor going forward, even in the AI dream world that allegedly we're all going to go towards, but that dream world is going to take a lot longer to get there than the forecasters are telling us,” he said.
3) Wages aren’t keeping up
Wages have not been keeping up with inflation recently. Kashkari described the labor market as “treading water.”
“It definitely is not a hot labor market like it was a few years ago, where businesses are desperate to keep the workers that they have, let alone to hire more workers,” he said. “It has definitely cooled off.”
But that might not be the case for long, he said.
“Workers ultimately are going to demand that they be able to make their basic ends meet, that their needs be met, and so one of the challenges is even if these supply dynamics fade, I would expect wages to continue then climbing to enable workers to slowly catch up,” he said.
That increase in wages, in turn, might cause inflation to fall less quickly than it otherwise would, he said.
“A very complicated set of dynamics (is) going on right now,” he said.
