Federal Reserve CEO visits Rapid City businesses

RAPID CITY — The government shutdown has made it difficult for the Federal Reserve to gain access to necessary data for monetary policy decisions, and therefore visits from fed representatives to various parts of the country have become even more important than ever, Neel Kashkari, president and CEO of the Federal Reserve Bank in Minneapolis, said on Thursday.

Kashkari was in Rapid City with all 20 members of his board from the 9th District of the Federal Reserve, to visit with local business owners and economic stakeholders about their experiences with the economy. It's standard practice to visit South Dakota every one or two years, he said, but this year's input and anecdotes are especially important to take back to Washington D.C., as the fed works to bring inflation down from 3 to 2 percent. While in Rapid City, Kashkari made a special effort to meet with Native Americans from every sector of the business community. Additionally, a town hall-style meeting, hosted by Elevate Rapid City, allowed interested stakeholders the chance to ask questions and provide feedback about the economy.

"Right now we're all wrestling with a big fundamental question, which is, inflation is still too high, the stock market is booming, and yet there's signs that the labor market is slowing," Kashkari said. "So how do we make sense of those? Usually they all go in the same direction and now we're seeing these mixed signals. To me, what I've heard so far is more consistency with that story. There are signs of some economic slowing, but nobody was saying things are falling quickly. Nobody was saying the economy is hitting a wall. Yet we did hear a lot of concerns that people are feeling the effects of inflation, feeling the effects of tariffs."

He added that businesses reported it has taken longer than expected to feel the effects of tariffs. That's largely because of high inventory levels, but now that businesses have to replenish those stores they expect prices could go up by the end of the year.

But Kashkari said if tariffs remain at their current 15-16 percent average, he does not expect there to be a spike in inflation levels to 4 or 5 percent. Rather, he believes the risk of inflation could be persistence at 3 percent, over one or two years.

"If tariff rates don't keep going up from here, eventually the inflation ought to come back down," he said. "Inflation is an annual price change. In theory, tariffs increase prices. But in theory they increase them once, so it goes up but it shouldn't keep going up from here. So, in theory, the inflation should not be persistent. But then our job at the fed is to make sure that it's not."

The uncertainty of the economy is the reason the fed is making conservative cuts. Kashkari said he supported the cuts in September, and he believes it is reasonable to consider two more smaller cuts this year. The smaller cuts are important, he said, because decisions are made based on data that can be slow moving.

"So, if you made a 75 basis point cut, then the data came in a month later, or two months later and said 'oh, actually the economy is doing much better than we thought.' Then we might regret that cut," he said. "If we make one small cut, the data comes in a little stronger, and then maybe you don't have to follow through with the next cut or the one after that. It's like if you're driving in fog, what do you do? You slow down as opposed to speeding."

Despite the cuts, long-term interest rates for mortgages don't seem to be going down. Kashkari said that's because the fed activities are only a small part of the formula for interest rates. Other parts include the building market, which is focused more on artificial intelligence data centers versus housing units.

"We've seen a boom in investment in data centers for artificial intelligence and cloud computing and things like that," he said. "That means all of these investment dollars are being channeled across the country into this one sector. Part of the way that happens is that it pushes up interest rates across the economy. So instead of building houses or building apartments, some of that money is now building data centers and the way it works is mortgage rates end up being higher because some of the homes that would have been otherwise built if mortgage rates were 3 percent are not going to get built. That same money is instead moved over there to build data centers. We control only one piece of that. Other macroeconomic forces control the rest."

Additionally, for mortgages, Kashkari said the local availability of housing factors into the price more than interest rates. If interest rates get cut while there is a housing shortage, that drives prices up even more, he said.

"So the affordability and housing crises that we have is driven by the fact that we've not built enough homes since the great financial crisis," he said. "In 2008 and 2009, home production in America was way down from what it was before. We have a shortage, a structural shortage, of the number of units that we should have built, that we did not build. Interest rates cannot solve that."

Job growth across the country has slowed significantly, Kashkari said. Part of the reason, he said, is there are fewer immigrants coming into the country. Another reason is the slow in demand for workers.

"What I've been hearing from businesses is that they're still feeling the effects of inflation and more effects of inflation are likely still to come," he said. "But the demand for labor seems like it's softening a little bit, relative to where it was a year or two ago."

During the town hall meeting, many Native American representatives from Community Development Financial Institutions (CDFIs), the National Congress of American Indians, and others praised the fed for their efforts to give Native American business owners access to capital. Programs such as the Center for Indian Country Development, which advances the economic self-determination and prosperity of Native nations through data and research that inform policy decisions, have helped with housing and business development, and expansions are needed, they said.

Tawney Brunsch, executive director of Lakota Funds, serving the Pine Ridge and Rosebud Indian Reservations, asked about how the fed can help small community banks gain access to affordable capital. Kashkari said the best way the fed can help is by bringing stakeholders together who are interested in specific topics, and leverage those connections. Dispassionate research into solutions and resources is another resource the fed can provide.

But Kashkari said the fed is not in charge of fiscal policy, and so ultimately it is up to federal, state, and local governments to decide how tax dollars can be allocated to support a given sector or market.

The most important way the fed can help financial markets, Kashkari said, is to maintain its independence from politics. The fed, in its current form, is the United Sates' third attempt at a central banking system. It works because it is not centralized in Washington, D.C., but rather is spread throughout the country in 12 independent Federal Reserve banks. When representatives from those districts come together, he said it's important that they leave their politics at the door. To do otherwise, he said, gives a short-term outlook on the economy, which can drive inflation rates up even more, he said.

"The best thing we can do when we face political uncertainty is to do our jobs to the best of our ability, leaving politics at the door," he said. "The more we do that, the more we are seen and acknowledged to be doing that, the more credibility I believe we will have with the American people that we are ultimately accountable to."

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