March 1, 2023

The president of the Federal Reserve Bank of Minneapolis heard from Sioux Falls business leaders Wednesday ahead of the Fed’s March meeting to determine an interest rate hike — and offered a sense of how he might weigh in on both short- and long-term moves.

“I’m open-minded at this point about whether it’s 25 or 50 basis points,” Neel Kashkari said of what’s expected to be an upcoming rate increase. More key is the quarterly “dot plot” summarizing the future outlook, he said.

In December, he thought rates would go to 5.4 percent and hold for an extended period of time.

“And I was on the more hawkish distribution among my colleagues,” he said.

Now, following “very strong job reports” and high interest rates, Kashkari said what he called “concerning data points” suggest the Fed isn’t making progress bringing rates down as fast as it would like, though he cautioned against reading too much into one month’s reporting.

“At this point, I have not decided what my dot is going to look like, but I lean toward continuing to raise further, that I would continue to push up my policy path.”

There’s another inflation and jobs report coming before the Federal Open Market Committee meets March 21-22.

“This is a very complicated economic environment that we are in in terms of our ability to analyze it using the traditional analytical tools we have,” Kashkari said. “So conversations like this … these are very helpful to help us make sense of the mixed economic signals that we’re seeing.”

Kashkari spoke to an audience of Sioux Falls CEOs and business community leaders at the first annual SiouxFalls.Business CEO Summit, sponsored by MarketBeat. It was part of a two-day visit to Sioux Falls in which he met with a variety of industry leaders, including construction and service providers.

“Overall, business is doing very well in this community,” he said. “The services economy continues to be very strong. We’re not yet seeing much of a sign of our interest rate increases slowing down the service side of the economy, and that is concerning to me.”

The Federal Reserve’s dual mandate is to maximize employment while maintaining a targeted 2 percent inflation rate. The goal currently is to “gently bring the economy down to a 2 percent inflationary environment,” achieving a so-called soft landing, he said, while acknowledging that “most of the time it leads to a recession. We would like to avoid a recession, but we know we have to get inflation down. Getting inflation down is job one.”

The bigger risk is not ratcheting down inflation enough, he said.

Across the 12-state region encompassed by the Minneapolis Fed, many state governments “are very flush” with “monster” surpluses, he added, leading some to contemplate taxpayer rebates.

“If that’s putting more money in people’s pockets to go out and spend on airplane tickets and food and buying things, it’s hard to say that’s bad, but it does feel like more stimulus, and that gives me pause,” he said.

In South Dakota, there are proposed changes to the sales tax rate.

Business leaders in Sioux Falls also shared the city’s slowdown in the single-family housing market, which Kashkari said was not surprising given mortgage rate increases.

“What’s challenging about this is the inflation that we’re experiencing is not being driven by the labor market. At least not yet,” he said. “The sources of inflation have been different than what we have normally been looking for.”

It’s things like supply chain, fiscal stimulus and the war in Ukraine, he said.

“All of these things conspired to lead to these very high prices that we’re all paying.”

The Sioux Falls labor market is being challenged by multiple forces — what Kashkari called “an acute hot labor market nationally” and the “structural challenges” that existed long before the pandemic.

“Always remember, 1 million Americans died from COVID, and each one of those is a human tragedy, but it also represents a lot of labor potential that is no longer there,” Kashkari said, adding early retirements, immigration drying up, and child care- and health care-related issues also hurt the labor force.

“Monetary policy can try to bring the economy into balance in the short term, but the long-run structural issues, monetary policy can’t do anything about.”

Kashkari’s town hall led off a morning summit that included panel discussions on the direction of health care, the startup journeys of three CEOs who scaled their businesses impressively in Sioux Falls and three members of the SiouxFalls.Business 30 Under 30 who discussed the emerging generation in the workforce.

“Our hope is that this could be an annual event where business executives gather in the community to talk about the future of the community,” said Matt Paulson, founder and CEO of presenting sponsor MarketBeat.

“We really want to make the institutions in our city better, and we want to encourage everyone in this room to work together to find innovative solutions to the challenges our community has today.”

Meet the SiouxFalls.Business 2023 30 Under 30