Neel Kashkari on the Fed’s Quest To Get To Full Employment

Episode Summary

Executive Summary: The episode centers on a wide-ranging interview with Minneapolis Fed President Neil Kashkari about the post-pandemic labor-market recovery, the Fed’s new average-inflation framework, and the limits of monetary policy. Kashkari argues the labor market is improving but still far from healed, inflation looks largely transitory, and the Fed should avoid premature tightening while remaining humble about how far employment can improve.

Main Topics: Labor market recovery and remaining slack (Priority: 5/5): Kashkari says the July jobs report was strong, but millions of jobs are still missing versus the pre-COVID path, so the recovery is incomplete. Why workers are still absent (Priority: 5/5): He points to multiple explanations for labor-force shortfalls: COVID fear, childcare constraints, enhanced unemployment benefits, and temporary hesitation rather than a permanent change in work preferences. Full employment, wages, and inclusivity (Priority: 5/5): The discussion explores how the Fed now thinks about a broader definition of full employment, including labor-force participation and reductions in racial unemployment gaps, not just the headline unemployment rate. Inflation and the ‘transitory’ debate (Priority: 5/5): Kashkari argues current inflation is concentrated in a few reopening-related sectors and does not yet signal sustained broad inflation, though he says broader or persistent price pressure would force reassessment. Fed framework, dot plot, and communication (Priority: 4/5): He defends the new flexible average-inflation framework, says the dot plot is flawed and overinterpreted, and suggests the FOMC statement could be simplified. Asset purchases and financial stability (Priority: 4/5): Kashkari says QE still supports the economy and signals policy commitment, but tapering could begin after more strong jobs reports. He prefers targeted financial-stability tools over using rates to fight asset bubbles. Monetary policy versus fiscal and business-led solutions (Priority: 4/5): He argues monetary policy matters, but fiscal policy, infrastructure spending, and employer-led training are also essential for bringing workers back and expanding opportunity.

Key Arguments: The labor market is improving quickly, but the U.S. is still 6-8 million jobs below the pre-pandemic path, so there is meaningful slack left. Most people want to work if decent jobs at decent wages are available; current nonparticipation is more likely driven by COVID fears, childcare, and temporary incentives than by a permanent change in attitudes. The Fed should be humble about declaring maximum employment too early because past estimates of the natural rate of unemployment repeatedly proved too pessimistic. Inflation should be judged by its breadth, persistence, and market expectations, not by a few reopening-sensitive categories like autos and travel. The new average-inflation framework is meant to correct for a decade of undershooting 2%, but temporary reopening inflation should not be treated as the kind of overshoot the Fed intended. The dot plot is misleading because markets and the public treat it like a forecast even though it is meant to reflect policy views, not predictions. Quantitative easing mainly works by signaling commitment and shaping expectations; its effects can be large even if models suggest modest direct impacts. If financial stability risks emerge, macroprudential tools like capital buffers are preferable to using monetary tightening that slows employment gains. A tighter labor market can create positive social changes by pushing firms to train workers, relax screening practices, and hire more broadly.

Data Points: Payroll growth (July): 943,000 jobs - Kashkari and the hosts discuss the very strong July jobs report. Economist expectations for payrolls: About 870,000 jobs - The July payroll gain exceeded expectations. Unemployment rate: 5.4% - July unemployment rate, described as the lowest since the pandemic began. Job shortfall vs pre-COVID path: 6 to 8 million jobs - Minneapolis Fed estimate of jobs still missing relative to where employment would have been absent COVID. Inflation over two years: Around 2.3% to 2.4% - Kashkari cites a two-year view to show inflation is not wildly above target once reopening distortions are smoothed out. Underlying inflation estimate: Roughly 1.8% - He says underlying inflation has been running below the Fed’s 2% goal. Expansion length before COVID: 2018-2019 - He references the late-cycle labor market gains and wage improvements for low-income workers before the pandemic. Typical career length: 40 years - Mentioned in a sponsor ad for the BiggerPockets Real Estate Podcast. Real estate investing timeline: 15 years - Mentioned in a sponsor ad as an alternative path to financial independence.

Pivotal Quotes: "“as of our math that we do at the Minneapolis Fed, it still looks like we are six to eight million jobs below where we would have been had the COVID crisis not happened.”" — Neil Kashkari: On the size of the remaining labor-market hole after the strong July jobs report. "“I think the dot plot is deeply flawed for a lot of reasons... if it were up to me, I would kill it.”" — Neil Kashkari: On Fed communication and how markets interpret FOMC rate projections. "“I would much rather, for example, raise the counter-cyclical capital buffer... then say, you know what, we're going to slow the labor market recovery because we're worried about some frothiness in Wall Street.”" — Neil Kashkari: On preferring targeted financial-stability tools over tighter monetary policy.

Implications: Listeners should expect the Fed to stay patient on rates while debating tapering, even as jobs improve. The episode suggests inflation and labor data will remain highly contested, with policy sensitivity still centered on whether price pressures broaden beyond reopening effects.