Kashkari: Fed independence essential to a healthy economy

The economy does better when Americans trust the Federal Reserve, the president of the Federal Reserve Bank of Minneapolis said Wednesday, and that means keeping politics out of the central bank’s work.

Speaking at a Minnesota Women’s Economic Roundtable event in Minneapolis, Neel Kashkari said maintaining trust is crucial to keeping the job market healthy and inflation under control. But the historically independent Fed has been facing mounting pressure from President Donald Trump to lower interest rates, including specific social media callouts targeting Chair Jerome Powell.

“One of the things that the economics profession, central banking, governments and advanced economies around the world have figured out over the past 40 or 50 years is: Having an independent central bank that is making the best decisions it can, based on data rather than politics, leads to better economic outcomes,” Kashkari said.

Whether they realize it or not, U.S. consumers act differently depending on whether they believe the Fed is steering the economy in the right direction, Kashkari told attendees at the event.

One of the central bank’s main jobs is to keep inflation around 2%, the agreed-upon level to achieve maximum employment and stable prices. The Fed has been working since 2022 to reach that goal using the only tool it has: interest rate hikes.

Rates are currently between 4.25% and 4.5%, and the consumer price index (CPI) inflation measure was 2.7% year-over-year in July, down from a 40-year high of about 9% in 2022.

But if consumers don’t trust the Fed to bring inflation down, Kashkari said, that could make the problem worse.

The scenario goes like this: Workers worried about the rising cost of living might ask their employer for a raise. Employers, in turn, will raise wages to keep their employees afloat. To cover higher payroll costs, businesses will increase prices — and inflation will continue to rise.

After cutting rates last year as inflation neared the 2% target, the Fed hit pause this year amid uncertainty for how Trump’s on-again, off-again trade war might affect inflation. Officials are debating whether tariffs will have a one-time effect on prices or whether the pain will persist, Kashkari said.

“I’m in the camp of, ‘Hey, we need to watch this before we reach any further conclusions,’” he said.

Kashkari has said it’s possible the Fed will cut rates later this year.

Beyond the personal attacks on Powell, Trump has recently started an unprecedented effort to fire Fed Governor Lisa Cook.

The president has accused Cook, whom former President Joe Biden appointed to the seven-member Board of Governors in 2022, of mortgage fraud. Cook has denied the accusation.

In a Sept. 2 open letter addressed to Trump, members of Congress and the American public, a group of several hundred economists wrote the effort to fire Cook “threatens the fundamental principle of central bank independence and undermines trust in one of America’s most important institutions.”

On Wednesday, Kashkari did not comment specifically on the matter but praised Cook’s work on the Federal Open Market Committee.

“I look forward, hopefully, to Lisa being able to continue to contribute,” he said, “because she’s a very high-quality colleague whose opinion I value.”

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