The recent remarks made by officials from the Federal Reserve can often be compared to a compass, guiding market participants in their assessment of the economic landscape. A statement made by Neel Kashkari, President of the Minneapolis Federal Reserve, sparked widespread attention and deep discussion within the financial sector last Friday.

“This is still a good labor market,” Kashkari asserted during an interview, expressing his steadfast belief in the current state of the American labor market, “It isn’t as heated as it was a year or two ago,” he paused momentarily before pivoting, adding, “But the economy remains strong and business confidence is optimistic.” This commentary painted a picture of the current U.S. economy that is not only evolving but also resilient in the face of changing circumstances.

Kashkari's statements were not made in isolation; they were solidly underpinned by the latest economic data. According to the U.S. Bureau of Labor Statistics, the recent employment growth figures for January fell short of market expectations, raising concerns among investors and economists regarding the pace of recovery in the U.S. job market. However, other facets of the data revealed a more positive outlook. The non-farm employment figures for December were revised upward, indicating that the job market had performed even better than initially estimated over the previous month. At the same time, the unemployment rate dipped to 4%, marking the lowest level since May of the previous year, showcasing a favorable development in the job market's ability to absorb labor. Notably, average hourly earnings saw a month-over-month increase of 0.5% in January, the largest single-month rise since August of the previous year, which strongly indicates that wage growth remains resilient, allowing workers to attain considerable income advancements within the job market.

Like many of his colleagues at the Federal Reserve, Kashkari adopted a cautious attitude toward the future of interest rate policy. In light of the current complex and ever-changing economic environment, particularly considering the potential uncertainties brought about by government policies in the U.S., this caution appears particularly necessary. He clearly stated, “We are currently in a very favorable position to maintain stable interest rates until we obtain more specific information regarding tariffs, immigration, and tax policies.” Adjustments in U.S. government policies can often have a ripple effect, with changes in tariffs directly impacting international trade and domestic price levels. Changes in immigration policy can profoundly influence supply and demand within the labor market, while adjustments in tax policy affect economic decisions made by businesses and individuals. Maintaining stable interest rates in the face of such uncertainties represents a prudent approach until these policies are more clearly understood. Moreover, he anticipated that the federal funds rate would experience a “moderate” decline by the end of this year. This forecast takes into account the current trajectory of economic progress, while providing a degree of guidance for market expectations.

Reflecting on the Federal Reserve’s monetary policy journey, during the meeting held on January 28-29, the Fed decided to keep interest rates unchanged. Previously, in the last three meetings of 2024, the Federal Reserve had cumulatively lowered rates by one percentage point. This series of measures aimed to respond to changing economic conditions and stimulate growth. While markets have consistently anticipated further cuts, hoping to capture additional policy advantages, most Federal Reserve officials have their considerations in mind. They believe that, with inflation still not having fallen to the target level of 2%, it indicates that the important goal of price stability has not yet been fully achieved. Additionally, the labor market remains robust, and economic growth has substantial support. Under such circumstances, the pace of rate cuts will likely slow down this year.

In December of last year, the median projection by 19 Federal Reserve officials indicated only two possible rate cuts in 2025. This projection reflects the Fed's cautious assessment of future economic conditions. Furthermore, various policies from the U.S. government, including immigration restrictions, tax cuts, and adjustments in tariffs, may significantly affect economic growth and inflation. Restrictions on immigration could reduce the supply of labor in the job market. Tax cuts could impact the fiscal revenue available to the government as well as the disposable income of businesses and individuals. Tariff adjustments could alter the pricing of imported and exported goods and reshape the competitive landscape within domestic markets. The combined effect of these policies has resulted in market expectations for rate cuts by the Federal Reserve in 2025 being tempered. Within this context, Kashkari's prediction of a “moderate” decline in interest rates undoubtedly provides market participants with an important reference point, enabling them to form clearer insights regarding the direction of future rate policies.