the money game

Neel Kashkari on the Debt-Ceiling Crisis and Greedflation

“Any kind of shock to our economy, it’s always the poor who pay.”

Photo: Hugo Yu
Photo: Hugo Yu

Neel Kashkari owes his career to crisis. At 35, he was a Goldman Sachs banker few had ever heard of before he was tapped to oversee Washington’s $700 billion financial bailout, the Troubled Asset Relief Program — an experience so vexing and massive it drove him to leave Washington, D.C., for the woods of Northern California. After a failed run to be the Republican governor of California, he was appointed president and CEO of the Federal Reserve Bank of Minneapolis in 2016. For a while, things were basically fine: The Fed’s two main jobs are to keep employment high and inflation low, and the next three years would be a period of economic prosperity where they basically succeeded. COVID changed that like it changed everything, leading to trillions in relief in 2020, then the ripple effects that followed: runaway inflation, a rapid tightening of the economy, and the collapse of lenders like Silicon Valley Bank in March.

On the morning Kashkari came to the New York offices, crisis was again on his mind. I got the sense he spares little time for distractions: His head was closely shaved, the Windsor knot on his blue-and-white tie was tight, he showed up ten minutes early. We sat down in an office looking out onto the Statue of Liberty to talk about the debt-ceiling debacle playing out in D.C., the maybe-but-maybe-not tamed problem of inflation, and the recession that many economists see looming in the months ahead.

These kinds of topics were on Kashkari’s mind in both specific terms and general ones: He had just published an essay lamenting an economic system with so much “fragility” that it needs to rely on the Fed as much as it does, with three separate bailouts in 15 years. “I mean, you worry about what you can control, right? And we have no ability to control that.On the debt-ceiling standoff, it was as if the had finally met a crisis he could not contain: It’s purely up to the executive branch and Congress to come to some type of resolution,” he told me. If Washington couldn’t pay its debts, though, there is little — if anything — that Kashkari or anyone else at the central bank could do. “If the government defaults on its debt, we’re not going to protect the economy from recession,” he said. “There is no way the Federal Reserve would be able to undo the harm, the hit the confidence of investors around the world, in their belief that they can bet on America.”

There is arguably no other organ of the government that has as much command over the U.S. economy — and therefore, the global financial system — as the Fed. This year, Kashkari is taking a turn as a voting member of the central bank’s committee that sets interest rates, a body that tries to figure out an otherwise impossible question: How expensive should anything be? But even though the Fed has seen its powers expand wildly over the past two decades, he’s now coming up against the limits of what anyone can do when our elected officials start acting in ways that seem self-destructive. “There’s a lot of contingency planning going on within the Federal Reserve System, but it really is about making sure that the plumbing of our financial system works,” he said.

Among the potential plans, he said, is to use the Fed’s powers of emergency lending and buying debt to keep the economy going — but he conceded that would depend on the willingness of the U.S. Treasury to participate, and it’s all speculation now, anyway.

What is not really on the table, though, are some of the potential workarounds that can get around the debt ceiling. “Minting the coin is silly,” Kashkari said, brushing away the suggestion with his hand. He was referring to a popular Twitter solution for the Treasury to authorize a $1 trillion platinum coin that would then get deposited at the Fed. At issue there is the question of the Fed’s independence from the Treasury in controlling the amount of money in the financial system. “The coin, so to speak, would be the Treasury saying, ‘Here’s a trillion dollars, go print a trillion dollars to fund our account,’he said. “That means they’re going to tell us to go increase the money supply by a trillion dollars and give that money to them so they can go meet their obligations. It would literally violate the sanctity of monetary policy and keeping it independent from the fiscal authority.”

During our 40-minute conversation, Kashkari rarely broke eye contact despite the clear view out onto the Hudson River behind me. The Fed is not exactly an institution known for being up front — apparently preferring to use less obvious channels to get messages out to the markets — but I got the sense that Kashkari sees part of his mission as demystifying his job for the general public, who are profoundly affected by the decisions he and his colleagues make. For most, that means his decisions around interest rates. Last year, Fed Chair Jerome Powell hiked interest rates at the fastest clip since the 1980s as annual inflation rose to a 21st-century record of 9.1 percent. Already, the potential for pain was high. Higher interest rates mean that things get more expensive — not only do mortgages and car loans cost more, but businesses that could otherwise hire more workers (or pay them higher wages) typically have to set aside that money for interest. This destroys demand, which keeps inflation low. But it also risks bringing on a recession.

So does Kashkari think that recession that so many economic observers are worried about — and have been worried about since last year — is coming soon? Well, not really. “It seems like the economic fundamentals are still quite strong. In fact, they’re stronger than I would have guessed, given how much we’ve already raised interest rates,” Kashkari said. “Right now, it doesn’t look like we’re heading for a recession.”

Perhaps because optimistic about the overall state of the economy, Kashkari wants to keep rates higher, longer, to prevent inflation from getting stirred up again. He had been on CNBC that morning saying that the Fed could pause raising rates in June — which would be the first time since last March that it took no action — and told me he would have no problem voting for more increases later on. “If inflation goes up, one could make the case that the federal funds rate would need to go up, too,” he said.

How high does he see rates going? He wouldn’t put a number on it. But all that hiking comes with trade-offs. Higher rates are partly responsible for the spate of bank crashes this spring, which in turn caused surviving banks to pull back on giving out more credit. Less lending means, potentially, less hiring, more layoffs, less growth — recession. Wall Street is convinced the Fed won’t stick to its current plan and will cut rates again by the end of the year. One way to read these kinds of predictions is that the markets don’t have confidence that the Fed will stick to its plan, and will cut rates lower when it gets unpalatable to keep them so high. Kashkari reads those predictions another way: The Fed’s plan will be so effective that inflation will fall faster than the central bank is predicting. He also doubts that he and his colleagues at the Fed will be cutting rates anytime soon. “My expectation is that there’ll be no cuts this year,” he said. “I would have to be very surprised, and inflation would have to fall much more quickly than I expect, for me to support cutting interest rates this year.” I asked him if that would mean inflation would have to plummet to the central bank’s 2 percent target. (It’s now at 4.9 percent.) “Not necessarily,” he said. “But it would have to be well on its way down to 2 percent, so that we were convinced.”

At one point, Kashkari and I talked a bit about the new terms that have come to define this post-pandemic economy — the vibecession that made a not-bad economy feel awful; the idea of greedflation, where prices rise because companies take advantage of general inflation worries, not because there are supply-chain problems that might be affecting other parts of the economy. Kashkari seemed amused to talk about the terms, and the ways that people are trying to understand an economy that is as bizarre as this one.

When it comes to greedflation, he’s been using a term of his own: surge-pricing inflation. “When a rainstorm comes, everybody wants an Uber. Nobody wants to walk, and the price skyrockets,” he said. Is it greed? It’s complicated. The boom-bust of another tech company may help explain why so many companies have been raising prices for the last two years: Peloton. “During the pandemic, you saw companies like Peloton saying, ‘This is the new normal, this is the future, gyms are dead.’ They bet the company on building more supply and then all of a sudden habits went back,” Kashkari said. “There are quite a few companies saying, ‘This is a hot environment that we’re in. We don’t know how long it’s gonna last. We’re not going to go build some massive new factory, because two years from now, it may not be here anymore.’”

I don’t know if Kashkari has a tell for when he gets excited, but the topic of inflation — where it comes from, how to cool it — made him talk with his hands a bit more, lean a little closer to my end of the table. It’s a problem with no easy solution. In his essay lamenting the three government bailouts since 2008, he essentially advocates for banks to put more skin in the game by holding more capital — a clear and understandable fix, even if Wall Street banks would never go for it on their own. But the basic problem of inflation is slipperier. It’s something of a social phenomena, a decision by some people to raise prices, and the response from others who agree to pay those prices. Where that limit is, or how it gets reversed, still isn’t really known, and the fact that it affects everyone made it all the more vexing. High inflation “disproportionately affects the lowest-income workers,” he said. “And it’s just a hell of a thing, that no matter what happens to our economy, it’s the same group of folks who pay the price. And that — I don’t know what to do about it. But it’s big. I’m more and more aware of it every time something happens. Any kind of shock to our economy, it’s always the poor who pay.”

Neel Kashkari on the Debt-Ceiling Crisis and Greedflation