Federal Reserve's Kashkari on Rates, Trump Tariffs, Bitcoin Concerns

Summary

The discussion focuses on the Federal Reserve's monetary policy amidst a resilient economy, inflation control, and the labor market. With interest rate cuts being considered, the Fed weighs the impact of housing inflation and bond yields. Global risks, including China's economic slowdown and potential trade tariffs, are addressed. The Fed remains cautious on cryptocurrencies, highlighting their speculative nature and the financial risks tied to institutional investments. Ultimately, the Fed’s commitment to controlling inflation and maintaining employment stands central, as policymakers monitor both domestic and global economic conditions.

Takeaways

• 😀 The nominee for Treasury is unknown to the speaker, and they remain neutral about the appointment, emphasizing the importance of President Trump's choice and Senate approval.
• 😀 The Federal Reserve's primary goals remain focused on lowering inflation to the 2% target and maintaining a strong labor market, regardless of who is in office.
• 😀 A potential 25 basis point rate cut in December is still under consideration, as inflation is running slightly above the 2% target, but the labor market remains resilient.
• 😀 Despite the stock market rally, which could boost consumer spending, the Fed is cautious not to overreact to short-term market fluctuations and continues to monitor long-term bond yields.
• 😀 Goods inflation has returned to pre-pandemic levels, and services inflation is trending downward, largely due to slower wage growth. Housing inflation remains high but is expected to decrease in the future.
• 😀 There is a growing concern about China’s economic struggles, particularly in the housing sector, which has been a major driver of growth. The speaker is watching Chinese policymakers' actions closely.
• 😀 Risks to the global economy from a slow-growing Chinese economy may impact commodity markets and Asian economies, but other Asian economies have diversified trade relationships with the US and Europe.
• 😀 The Fed maintains its independence, despite political leaders occasionally voicing opinions on monetary policy. The central bank remains focused on data-driven decisions rather than short-term political pressures.
• 😀 Cryptocurrency, especially Bitcoin, continues to be viewed as a speculative asset with limited practical use in advanced economies. The speaker questions its utility beyond speculation, especially as it failed to act as an inflation hedge during high inflation periods.
• 😀 The speaker is not concerned about the speculative volatility of Bitcoin itself but is focused on the potential risks crypto assets pose to the stability of the financial system, particularly with stablecoins and their investments in potentially risky assets.

Q & A

What is the speaker's stance on the nominee for Treasury?

The speaker does not have an opinion on the nominee for Treasury, stating that it is President-elect Trump’s decision to nominate and for the Senate to confirm. Regardless of who holds the position, the focus will remain on the Federal Reserve’s objectives of controlling inflation and maintaining a strong labor market.

How does the speaker assess the current inflation rate and its trend?

The current inflation rate is running around 2.5–2.6%, slightly above the 2% target. However, the speaker believes inflation is generally trending downward, especially in goods and services inflation, which are both showing signs of improvement. The biggest remaining challenge is housing inflation, which is expected to decline.

Why is the speaker considering a 25 basis point rate cut in December?

The speaker sees a 25 basis point rate cut in December as a reasonable consideration due to inflation being above the target but trending down, and the resilience of the labor market. There is also uncertainty about the neutral rate of interest, with high interest rates not appearing to put as much downward pressure on the economy as expected.

Why is the speaker not in favor of pausing rate cuts despite economic resilience?

While the speaker acknowledges the resilience of the economy and labor market, they point out that inflation in goods and services is improving, and housing inflation is expected to decrease. These factors suggest that a continued focus on reducing inflation is necessary, even if the economy remains strong.

How does the speaker interpret the stock market rally and its potential impact on monetary policy?

The speaker recognizes the wealth effect of a stock market rally, where people feel wealthier and may spend more, but cautions against overreacting to short-term market movements. They also note that rising long-term bond yields could indicate higher growth expectations or increasing deficits, which may influence the Fed’s monetary policy decisions.

What is the speaker’s view on the economic risks posed by China?

The speaker acknowledges the risk of potential tariffs between the U.S. and China but emphasizes that China's internal economic challenges, especially in the housing sector, pose a bigger concern. These challenges could lead to slower Chinese economic growth, which could affect global markets, particularly in commodities.

What role does China’s economic slowdown play in the global economy?

A slowdown in China’s economy could have a significant impact on global commodity markets, as China is a major consumer of goods like steel, iron ore, and other minerals. The speaker also notes that other Asian economies, which are increasingly connected to the U.S. and Europe, could continue to perform well despite China’s struggles.

How does the speaker respond to the proposal for a 'shadow Fed chair'?

The speaker does not fully understand the proposal for a 'shadow Fed chair' and points out that the proponent has since withdrawn it. The speaker reaffirms that the Fed remains committed to its independent role of focusing on stable prices and maximum employment, rather than responding to political pressures.

How does the speaker address the potential threat to the Fed’s independence from political leaders?

The speaker emphasizes that the Fed has a long-standing tradition of political independence, with both Republican and Democratic leaders historically agreeing on the importance of an independent central bank. The Fed’s focus will remain on economic data and fulfilling its mandate, regardless of political pressure.

What is the speaker's view on cryptocurrencies, particularly Bitcoin?

The speaker is highly critical of Bitcoin and cryptocurrencies, questioning their utility in an advanced economy. They argue that Bitcoin does not function as a reliable payment tool or inflation hedge and is primarily a speculative asset. The speaker stresses that while people are free to speculate on cryptocurrencies, they have yet to see any practical application for them.

What concerns does the speaker have about the involvement of institutional investors in cryptocurrencies?

The speaker is not concerned about cryptocurrencies themselves as a financial stability risk but does worry about potential risks to the U.S. financial system if institutions are not careful. Specifically, they highlight the risks posed by stablecoins and the potential for them to function like banks without the same regulatory oversight, which could lead to instability.