Kashkari’s Comments on the Year Ahead

We were delighted to host Minneapolis Fed Chair, Neel Kashkari, to our January Lunch With Leaders event this past Wednesday. I have paid special attention to the Fed these last 18 months, tracking the markets and inflation – and monetary policy – as we adapt to the changing face of this pandemic. As always, I find Kashkari both personable and eloquent, as he talked about the balancing work constantly underway at the Fed. I’m sharing some highlights that I found particularly relevant:
 
“The basic job of the Fed is to manage the ups and downs in the US economy to try to achieve stable overall economic growth.” We have dual mandate: 1) stable prices, typically 2% inflation year over year; 2) maximum employment. They are linked like a seesaw. As the economy heats up and businesses compete for workers, traditionally this leads to unemployment rate going down, wages going up. Those, then, lead to prices increases and inflation.  Fed raises interest rates to keep the seesaw in balance.   Pre-pandemic, we saw very low unemployment, we did not see wages increasing significantly, and inflation remained very low. That in itself actually was unique.
 
So the economy was in a very good place pre-COVID. Then we experienced an unprecedented shock to the economy. Recovery has begun, but it is uneven – within the service industry in particular. In the meantime, people have shifted spending towards goods. So this last year we saw big inflation and excess demand for goods. This translated to supply chain disruptions… part due to COVID, part due to this excess demand.
 
Right now, we are seeing very high inflation, higher than expected and longer than expected. The key question: how long will it last? On the demand side, we know how much Congress has allocated to stimulus. We know that is temporary and now fading. So the boost of excess demand ultimately will go away as well. The question, then, is supply. When do supply chains recover? This is a big area of uncertainty: when will workers return?  Nationally we are at 3.9% unemployment, and yet we still are 4-5M jobs short of where we should be without the pandemic. Where are the workers and what will it take to get them to come back to work? 6-9 mths ago I focused on generous unemployment benefits – now expired. Did not translate to a meaningful uptick in employment. Schools were closed – now far more reopened compared to last Spring. Again, did not significantly impact the labor market. Clearly, lots of certainty continues. 
 
So the timeline of supply side normalizing remains uncertain. Informally, companies are guessing: “not in 2022, maybe in 2023.” 
When we look at financial market indicators: there is long term confidence is that inflation will settle down. But we still have to watch the data.
 
Kashkari’s most interesting comments, for me, were on interest rates and how the Fed uses them:
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The housing market is one of the primary channels through which monetary policy affects the economy. If we move the federal fund rate up, long term rates typically go up with that. That essentially “cools down” the housing market somewhat. We have a lot of effect on that. We have signaled we will stop our quantitative easing program, rate increases are likely in the horizon, but mortgage interest rates are still at quite low levels. A key factor: what interest rate is “neutral” for the current economy? That neutral rate changes over time and has been declining over the last 20-30 years to very low levels. “We try to estimate where that neutral rate is, and then we decide whether we want to provide some boost to the economy, then we’ll go below neutral to provide stimulus. Or, if we want to tap the brakes, we would raise interest rates above neutral.”  We’re not likely to return to interest rates seen 20-30 years ago, because today’s “neutral” is so different.  Mortgage interest rates should remain fairly attractive for the foreseeable future.
 
My takeaways from our conversation: expect interest rates to go up in 2022, perhaps 2 adjustments this year. Long term indications are good that the underlying fundamentals of the economy will right the ship, as it were. But 2022 will continue to be a year of readjusting – particularly in the workforce.
 
One more note from the Fed: the next quarterly business survey from the Minneapolis Fed will be conducted from Monday, January 17 to Monday, January 24.  Please take this 5-minute survey to help the Minneapolis Fed and President Neel Kashkari better understand effects on your firm. With other business voices from across the Ninth District, your input will help the Federal Reserve System shape monetary policy to help businesses thrive. If you get this survey from multiple sources, please respond to the survey only once. 
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See you in the trenches.
B

• Omicron:
  • Unpredictability: Before the Delta variant emerged, infections among vaccinated people — known as breakthrough infections — were rare. Delta led to an increase in breakthrough infections, and Omicron has led to a larger increase. Symptoms are usually mild, but they can lead to bad outcomes for a small share of vaccinated people whose health is already vulnerable, like the elderly. The surge of breakthrough infections means Covid often still dominates everyday life.  Michael Osterholm of the University of Minnesota — who has long emphasized Covid’s unavoidable unknowns — has said, “We still are really in the cave ages in terms of understanding how viruses emerge, how they spread, how they start and stop, why they do what they do.
  • Cases declining elsewhere:  in Europe and East coast this past week, a potential indicator for what’s ahead for us. Hard to make predictions, but is a positive data point. Omicron is so contagious that it spreads more quickly. This rapid spread may also mean that it more quickly reaches most of the people who happen to be vulnerable to being infected by it. Omicron’s brief boom-and-bust cycle is now “a familiar pattern,” Joseph Allen of Harvard’s School of Public Health says.  How is case count going in your county? Minnesota hospitals are still bracing for the Omicron wave, even as COVID-19 declines in ICUs.
  • Waning immunity: Toward the end of the summer, some researchers began pointing to data suggesting that the power of vaccines waned after about six months. Other researchers doubted that case, saying that the data was unclear — and that pharmaceutical companies had an obvious incentive to promote waning immunity and boosters. But the case for boosters now seems clear. Another lesson: The quality of Covid data in the U.S. is poor, often clouding early judgments. It can make sense to look to Israel, where the data is better. Experts there quickly recognized that waning immunity was real.  
  • Turning point? The beginning of the end of the Omicron wave — if it turns out to be real — would be very good news. It would mean that a milder variant had become the dominant form of Covid but was no longer causing a surge in cases and overwhelming hospitals. It would mean that tens of millions of Americans had built up additional immunity, as a result of an Omicron infection. It would mean that the country would have taken a big step toward a future in which Covid is an endemic disease like the flu, rather than a pandemic that dominates life. Lauren Ancel Meyers, who runs a Covid analysis project at the University of Texas, said that people might soon look back on Omicron as a turning point. “At some point, we’ll be able to draw a line — and Omicron may be that point — where we transition from what is a catastrophic global threat to something that’s a much more manageable disease”  

• Minneapolis and St. Paul Mayors announced patrons will need to be vaccinated or have a recent negative COVID-19 test to enter restaurants, bars and everywhere else that food and beverages are served for consumption indoors. The rule goes into effect on Wednesday.

 

• Americans can order at-home tests through a government website starting Wednesday.

 

• The latest guidance on Omicron from MDH.

• Government spending: We're just under a month out from the Feb. 18 government funding deadline to avoid a shutdown of federal agencies. What we're watching:  The top four spending leaders on Capitol Hill met for the first time on the issue on Thursday, signaling an open pathway for talks about a roughly $1.4 trillion omnibus spending package. Leaders in both parties are interested in increasing the current government funding levels, which Trump signed into law at the end of 2020.

• Inflation? The CPI hit an almost 40-year high, rising 7% in December. Potentially at risk are Biden’s big-spending plans.

 

• GreaterMSP’s the Federal Funding Hub website is live! Upcoming deadlines:
  • The EDA Good Jobs Challenge Application is extended until February 10th. 
  • Applicants for EDA Economic Adjustment Assistance are encouraged to apply by January 31st. 

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Federal:

• ETS mandate: no for private employers; yes for health care workers.  In a 6-3 vote, the U.S. Supreme Court knocked down a significant piece of President Joe Biden’s plan to combat the pandemic: requiring private employers with more than 100 workers to make their employees get vaccinated against COVID-19 or submit to regular testing.  But the justices allowed a separate rule requiring some health care workers to be vaccinated to stand, our Jacob Fischler reported.  “It is now up to States and individual employers to determine whether to make their workplaces as safe as possible for employees,” Biden wrote in a statement. 

 

• Federal trial begins Jan 20: 
  • Beginning January 18th, Robert Street and Jackson Street will be closed between Kellogg Boulevard and 4th Street, on either side of the Warren E. Burger Federal Building.  These closures will be in place for the duration of the upcoming trial of three former Minneapolis police officers charged in the killing of George Floyd.  Jury selection begins on January 20, and current expectation is that the trial will last for about four weeks.
  • The block of Robert Street between Kellogg and 4th Street will be the designated public gathering space throughout the trial.
  • The skyway over 4th Street connecting to Federal Building will be closed for the duration of the trial.
  • In addition to these road closures, some Metro Transit bus stops may be temporarily detoured.  The Green Line light rail will be in full operation. 
  • For the duration of the trial, the St. Paul Downtown Alliance Safety Communications Center will be operating a Fusus – Virtual Safety Network (VSN) Real-Time Information Dashboard in an attempt to keep downtown stakeholders informed of the current developments. Should your building security teams/property managers want access, please go to the SPDID Fusus - VSN Access Request page and submit your request.

 
State:  

• Minnesota Sentencing Guidelines Commission on Thursday delayed a controversial vote that would’ve shortened sentences for offenders who commit crimes while on probation or parole, after fierce criticism from lawmakers, law enforcement, and the public. More than 3000 people submitted testimony to the commission, nearly 95% of them urging the commission to reject changes they feared would further endanger the public as a rise in crime leaves the Twin Cities metro on edge. Response from Minnesota Police and Peace Officers Association Executive Director, Brian Peters: “MPPOA is ardently opposed to this unwarranted and untimely change. When an offender still on probation for the first crime then commits additional crimes, that aggravating factor needs to be reflected with an enhanced sentence. This proposal should be canned immediately as it prioritizes repeat felons over victims of crime who seek justice, and those that seek safety in their communities.”

 
Regional

• Minneapolis, St. Paul requiring proof of COVID vaccination for restaurants, bars.  Minneapolis, St. Paul business reactions are mixed.

 

• Meanwhile, suburbs take a pass on mask mandates.  Your Chamber shares the concern raised by Bloomington’s Mayor Busse: "Asking the teenager working at Boot Barn at the Mall of America to enforce [a mandate] for someone who comes in without a mask, I just thought that was unfair," he said, adding that voluntary mask use and vaccination rates appear high in the suburb.

 

• The Supreme Court 6-3 ruling partially disrupts plans in Minneapolis and St. Paul for vaccine requirements at hospitality venues, which both cities' mayors have ordered to kick in this Wednesday. While customers must be vaccinated or show a negative test to dine at bars or restaurants and attend entertainment venues, employees at those businesses will not be subject to the mandate. Late Thursday, St. Paul Mayor Melvin Carter signed an updated order striking his 24-hour-old requirement for hospitality employees while keeping the mandate on customers.”

 

• Twin Cities mayors, police chiefs, prosecutors join forces on rising crime.

 
Read more updates in our weekly Chamber Advocacy Update.

• St. Paul and Minneapolis have significant challenges ahead. Join us on January 27 at the University of St. Thomas to hear what our mayors have to say at our annual Breakfast With the Mayors.

 

• Our biggest event of every year is our Annual Meeting. More crucial than ever today is cyber security, and we’ll be hearing about that this year from this country’s preeminent voice: Join us on February 17 at RiverCentre to hear from the Director of the NSA/Cyber Command, General Paul Nakasone.

 

• The St. Paul Downtown Alliance has released a highlight reel of recent efforts.  It’s terrific – take a look!

• The benefits of remote work are worth the effort of adapting your management style. And you can be successful in both environments.

 

• Cohorts are gaining momentum as a way to keep bringing people together – despite being remote.
  • Equity Leadership Series (starts in March!)
    
  • Leadership St. Paul (starts in March!)
    
  • Join us for pure networking: Coffee and Conversation (starts in March!)
    
  • Join a committee (start anytime – we need you!)

• One of the first real nods to a potential shift in how we do business: Thomson Reuters may sell all or part of huge Eagan Campus as hybrid work becomes the norm.  

 

• Offer from Visit Saint Paul:  QUICKLY IMPROVE YOUR GOOGLE PRESENCE (AND DRIVE SALES). With the recent uptick in COVID cases, you may find that your business is reinstating some pandemic hours and practices. Keep your audience informed and up to date on your hours and health and safety measures with a platform intended to help Saint Paul businesses that serve tourists, meetings and conventions and improve your presence in mobile web searches. The goal is to connect more customers with your business - and it’s free to you ($1,200+ annual value)! By signing up you’ll be able optimize your Google Business listing AND measure how much your business listing drives sales.  Again, this is from Visit Saint Paul: Sign up now to show up more in search!

• First round of federal infrastructure spending heading for Minnesota bridge projects. State leaders expect $60M to flow into the state this year to help plan for major bridge projects.

 

• Ryan has broken ground on the M Health Fairview-anchored 60K SF medical office bldg. at Highland bridge.

 

• Soldier Trucking buys Bix Produce bldg. in Port Authority’s Arlington Jackson Business Center on the East Side. The plan is for 140 new jobs as the company relocates its operations from Menomonie, WI.