Inflation’s lower. The job market’s strong. So why all the economic uncertainty?

When Neel Kashkari first joined the Federal Reserve eight years ago, he quickly gained a reputation of being a frequent dissenter who often opposed raising rates.

These days, the president of the Minneapolis Fed has found himself in the opposite position: mostly agreeing with the rest of the rate-setting committee.

He fully participates in every meeting of the Federal Open Market Committee, but only has a vote on it every few years. Last year when he was a voting member, Kashkari didn’t object once to hiking rates or holding them steady as part of the Fed’s war on inflation. More recently, he’s also seen eye-to-eye with other policymakers on being patient and waiting awhile longer before they start cutting rates.

“I’m not shy about expressing my view,” he said in an interview.

But it takes a lot of confidence on what’s going on in the economy to say your view is right and the rest of the committee is wrong, he said.

“And right now, we’re getting so many mixed signals,” he said. “And things are reacting differently than we had expected. It’s hard to have that type of confidence or conviction.”

Never one to completely go along with the crowd, Kashkari has set himself apart in other ways. For example, he has suggested the Fed keep interest rates high for longer over time than most others on the committee. That makes him a “hawk” in Fed speak, a reversal from pre-pandemic days when he was a “dove” who wanted to keep rates low.

Regardless, Fed officials, including Kashkari, are hopeful as inflation has been coming back down after soaring to more than 9% at one point in 2022. Since then, the consumer price index has cooled off considerably to 3.1%, inching closer to the Fed’s 2% target.

And it’s happened so far without a much-anticipated and feared recession.

Kashkari answered far-reaching questions about the economy, edited here for length and clarity.

Q: First, how are lasagna prices these days? (A tray of frozen lasagna he often buys for his family has become one of his unofficial inflation gauges.)

A: The interesting thing is, I saw it in Lunds maybe a month or two ago. Before the pandemic, it was about $16. And then it went up to around $21. And it was still $21. But they had a sale — $5 off. So it was back down to $16. So I bought two.

Q: Any other observations from the grocery store about inflation or supply chains?

A: The shelves are usually full now. I think supply chains are mostly back to normal. We see that in the data. I see that in real life. But what people are experiencing is, by and large, prices aren’t coming down. They’ve just stopped rising. So that’s the big disconnect. We say, ‘Hey, we’re winning over on inflation because inflation is coming back down.’ But people aren’t happy because prices are still high generally speaking.

Q: The inflation data looks pretty good right now. How confident are you that the war on inflation is almost over?

A: It’s definitely going in our direction. I think we’re all reluctant to declare victory prematurely. I wish I could say, ‘We did a great job and that’s why inflation has come down.’ I think we’ve played an important role. But I think mostly it’s been supply [chains healing]. So in a sense, the inflation rates were transitory, just a lot longer than we anticipated.

Q: Why didn’t higher interest rates cool off the economy very much?

A: I do think it’s happened somewhat, but I think this goes back to the notion of a neutral interest rate. There are dynamics when the economy is recovering from a downturn, in this case the COVID downturn, when all of a sudden the neutral rate can go up. If there’s all this pent-up demand, it’s possible that that neutral rate has just soared in the short run. The big question is, where’s it going to settle in the long run once we get through this reopening period? That’s a big macroeconomic debate people are having. Are we going to go back to a low-rate environment that existed for a decade before, or are we going to something different? And I’ve heard really good arguments both ways. Nobody knows for sure.

Q: What gives you the most pause about inflation now?

A: We weren’t able to diagnose the high inflation when it hit us. And then we didn’t do a very good job of diagnosing why it stayed high for as long as it did. And now, we’ve been surprised at how quickly it’s come down in the past six months. There’s so much about this economy that is hard to have confidence in. It makes me reluctant to be too definitive in saying anything right now.

Q: Is there anything in particular you’re waiting to see before you say, ‘OK, now we can lower rates?’

A: A few things. One we want to have, and this is what Chairman [Jerome] Powell has said. It’s not that we need to see better inflation data. We just want to see more data, which is also good data, until we’re really confident we’re going to get back to 2%. So on the inflation front, let’s just get a little bit further away before we start lowering rates. Because financial markets are so prone to exuberance. The moment we give a hint, they run off to excesses. And so if we even say, ‘Well, we’re going to cut 25 basis points,’ they’re going to say, ‘Hallelujah, they’re going to extrapolate it far beyond what we intend.’ And so I think we’re all saying, ‘Let’s be really sure before we make that first cut.’

Q: Why did labor supply bounce back so much? Initially there was a lot of uncertainty if workers who left the labor market during the pandemic would ever return.

A: We don’t know fully. Immigration is definitely playing a role. But I also think it’s just Americans want to work. And maybe it’s the inflation, that people are saying, ‘Oh my gosh, prices are going up, I need to work just to try to keep my head above water.’ Some of those retirees, maybe they went back to work part-time. Maybe remote work opened some possibilities for some folks. Maybe all of the above.

Q: What’s been the biggest surprise for you about the economy?

A: Just the resilience — GDP [gross domestic product] continuing to put up great numbers. And by the way, people wanting to spend.

Q: You’ve talked about a gas station you go to that put in a bunch of automated screens to help with the labor shortage. Do they still have them?

A: No, they got rid of them. A few months ago, I went in there and they had ripped out all the computer screens and went back to glass doors. And I went up to the manager and said, ‘What’s going on? You just spent all this money on these computer screens.’ And he said, ‘Oh, yeah, those never worked right. And besides, we’re fully staffed now.’

Q: Does the labor shortage seem to be getting better?

A: Businesses say it’s still tight. They still have to work hard to find the workers they need, but it’s much better than it was a year or two ago. The unemployment rate is still low and wages are still growing attractively from a worker’s perspective. And then you have the structural issue that this whole region does not have enough workers over the long term.