Fed’s Kashkari holds firm on rate path despite softer PCE
New York Fed President John Williams had tried to temper expectations the previous day, saying he saw no immediate urgency to tighten further after the September meeting, but Kashkari’s remarks suggested he was not yet prepared to relent.
AI spending and the longer rate horizon
Kashkari also flagged a less-discussed variable shaping where rates ultimately settle: his estimate for the neutral federal funds rate has risen to 3.25%, driven partly by surging demand for investment capital linked to the artificial intelligence buildout.
If that investment delivers the productivity gains investors expect, the economy could absorb a higher neutral rate without serious damage. But Kashkari was direct about the risk.
“If this ends up being massive investment that is not nearly as productivity enhancing as we assume, then this will have been malinvestment, and then there could be big economic consequences for the economy writ large,” Kashkari said.
Rising bond yields, which tend to push long-term borrowing costs higher, have also been performing some of the Fed’s tightening work. The rate path remains data-dependent, and Kashkari showed no sign of stepping back from that position.
