Kashkari Warns Against Aggressive Rate Cuts: Inflation Rebound Risk

Minneapolis Federal Reserve President Neel Kashkari warned on Tuesday that any significant interest rate cuts could trigger an inflation rebound risk. Kashkari made the remarks at an "Artificial Intelligence and the Economy" panel discussion hosted by the Minnesota Star Tribune on Tuesday. "Essentially, if you try to push economic growth beyond its potential, push price increases beyond where they should be, you're just going to end up with across-the-board price increases throughout the economy," Kashkari said. The Fed official, who is not a voting member on monetary policy this year but participates in Federal Open Market Committee (FOMC) meetings, noted that current economic data shows signs of stagflation – slowing economic growth while inflation remains high. Kashkari also mentioned that although he doesn't believe artificial intelligence will quickly replace American workers, large-scale investment in AI data centers could still drive up borrowing costs, even if the Fed lowers short-term policy interest rates. U.S. President Trump has been pressuring the Fed to cut interest rates since taking office, partly to improve housing affordability. He also recently appointed a new Fed governor who claimed that Trump's immigration restrictions had driven down rent inflation and called for significant rate cuts. However, Kashkari said, "Even if the Fed implements one or more rate cuts, it may not translate into lower mortgage rates, because the money that might have been used to build homes or apartment buildings is being diverted to data center construction – those types of investments generate higher returns." "If we cut rates aggressively beyond what is necessary, regardless of the underlying economic fundamentals, we could eventually see very low unemployment and very high inflation, leading to an actual overheating of the economy," he added. Kashkari previously supported the Fed's 25-basis-point interest rate cut in September and believes it should be cut by the same amount at the next two rate-setting meetings later this month and in December to prevent further weakening of the U.S. labor market. At Tuesday's event, he did not elaborate on the above view – the event mainly focused on the impact of artificial intelligence on the economy – but he made it clear that he does not believe that artificial intelligence is the main reason for the slowdown in the labor market. He pointed out that tariff policies are both driving up prices and slowing economic growth. OpenAI chief economist Ronnie Chatterji also attended the summit, and he believes that artificial intelligence will increase productivity, while Kashkari is more skeptical about this. Kashkari said that he expects artificial intelligence tools to be good at accomplishing tasks in specific areas, but they will not become a "catch-all technology." In addition, although some companies, including Walmart, say that artificial intelligence will make them not need to increase the number of employees in the coming years, Kashkari pointed out that technological innovations in history often take a long time to truly penetrate the economy. "We've heard a lot of grand declarations, but we haven't seen actual evidence," Kashkari said. "I'm skeptical of the idea that a large number of workers are being replaced by artificial intelligence right now. In my opinion, it's too early to draw conclusions." ### Additional Analysis It's worth noting that Kashkari's stance reflects a broader caution within the Federal Reserve about responding too quickly to political pressure to cut interest rates. The central bank is focused on ensuring inflation does not return, even if it means keeping interest rates higher for longer. The impact of artificial intelligence is also an area of significant interest. While some see it as a powerful productivity force, others caution about its potential impact on employment and borrowing costs. The debate continues about how AI will shape the economy in the long run.