Fed official's blunt warning resets rate cut chances

One should listen carefully to what Neel Kashkari is saying about interest-rate cuts, and, if you do, you may not be happy.

The president of the Minneapolis Federal Reserve Bank was clear Tuesday that he believes the Federal Reserve should not rush to to cut interest rates, and he offered up the possibility rates may actually have to move higher before the Fed starts to begin trimming.

To support a rate cut, Kashkari wants real evidence that inflation is headed for a sustained pullback to the Fed's 2% target. And it is not likely to appear before the Fed's next meeting on June 11-12.

Mostly, inflation is stuck at just under 3.5%.

Kashkari said it twice on Tuesday: at a London event and during a CNBC interview as well. And he's been saying he doesn't want the Fed to rush into rate cuts since the end of April.

His mantra for this position is basically this:

The Fed has time to see if inflation will ebb enough, and he thinks, ultimately, that it will.
But now is not the time because of that too-little-data problem.
There's also too much to worry about: a robust jobs market, price rises for key goods and services that may force a rate hike. But he thinks the odds of a rate hike are low.

His cautious warning comes after a decent Consumer Price Index number on May 15 fueled big gains in the major stock indexes a week or so before the Memorial Day weekend.

The bulls' fervor has faded in recent days because there's an equally important inflation report coming out Friday: the Personal Consumption Expenditures Price Index, which the Fed watches very closely.

A shopper checks produce supplies and prices.

Why Kashkari matters

Kashkari is not a voting member of the Federal Open Market Committee, the Fed group that sets the key federal funds rate, the foundation of all U.S. interest rates. The rate is now 5.25% to 5.5%.

And his demand for sustained declines in inflation is shared by most Fed officials.

But, to investors, Kashkari's opinions are studied carefully because he was such a key player in the government's efforts to save the U.S. financial system during the 2008-2009 financial crisis.

So, it should not surprise that investors did not seem thrilled with Kashkari's thinking on Tuesday, the first day of U.S. trading after the Memorial Day holiday.

Inflation stability vs. demand for lower rates

The Nasdaq Composite Index was up 99 points to a record 17,020, largely because of the strength of technology stocks, especially Nvidia (NVDA) , up 7% to a record close of $1,140.59.

The index, however, looked for most of the morning like it would move much higher. Then, it seemed to stall, roughly when Kashkari's comments began to circulate.

The Standard & Poor's 500 Index opened up 11 points, went negative on the Kashkari news and finally ended the day up a whopping 1 point to 5,306. The giant SPDR S&P 500 ETF (SPY) , which tracks the index, was up just 0.7%.

The Dow Jones industrials fell 216 points to 38,853. Since the blue-chip index closed at 40,003 on May 17, it has fallen in four of the last six sessions.

The biggest Dow winners were Home Depot (HD) and Intel (INTC) , up 1.1% each. The laggards were health-related: Amgen (AMGN) and Merck (MRK) , down about 2%.

More Economic Analysis:

Investors pushed interest rates higher. The 10-year Treasury yield hit 4.56%, up from 4.47% on Friday and continuing an uptrend in rates that started on May 15 when the yield hit 4.34%.

Oil prices moved higher. But retail gas prices faded to $3.586 a gallon nationally from $3.592 on Monday and off more than nine cents from $3.679 on April 19, the high so far in 2024.

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