For Federal Reserve officials like Neel Kashkari, president and CEO of the Federal Reserve Bank of Minneapolis, the effort to tamp down inflation has become a waiting game.

While the latest numbers from the consumer price index came in higher than expected — prices were up 3.1% in January from a year earlier — inflation overall has plummeted since June 2022, shortly after the Federal Reserve began hiking interest rates. Yet there’s still plenty of room to go before inflation comes down to the Fed’s 2% target, and the last mile is often seen as the trickiest to navigate.

“Marketplace” host Kai Ryssdal spoke with Kashkari about where the economy stands and whether or not the Fed’s bouts with inflation in the 1970s have contributed to its decision-making today. The following is an edited transcript of their conversation.

Kai Ryssdal: Scale of 1 to 10, what do you think of this economy right now, 10 being good, 1 being really not good.

Neel Kashkari: I would say 7. I mean, right now we have low unemployment. We keep being surprised with strong economic growth, consumers seem like they’re doing well. There’s some, you know, some nervousness around the edges. But overall, the economy is doing very well.

Ryssdal: So what’s the monster under your bed? What’s keeping you up at night?

Kashkari: What’s keeping me up at night is an open question of whether or not inflation is going to continue the rapid progress we’ve made. You know, inflation is now running on a six-month basis around 2%. We need to see that continue for a few more months. So we’re not all clear yet. But that’s what’s keeping me up at night. Are we going to get all the way there?

Ryssdal: All right, so let me just on behalf of everybody out there who’s screaming at their radio or their podcasting device, saying, “Inflation is down? What are you waiting for? When are you going to cut rates? Come on!” Right? 

Kashkari: Well, I hope they’re right. There have been times in the past when the Federal Reserve has been faked out before, where we thought inflation was licked, and then it flared back up again. That’s what we want to avoid. We want to get the job done before we declare victory.

Ryssdal: Well, you know, I’m glad you brought up the time when you got faked out before, not you, but the institution itself. You and I spoke in 2018, and we spoke mostly about the financial crisis back then — it was the 10-year anniversary — but we had a conversation about inflation and what the Fed was worried about. And let’s remember, this is 2018. Inflation was, like, you know, 1.8-ish something percent. And I said, “What are you guys so worried about with inflation?” Here’s what you said, and again, it’s five-ish years ago:

Kashkari: “We are much more worried about high inflation than we are low inflation. And I think that that is a scar from the 1970s.”

Ryssdal: Essentially, it’s monetary policy by fear, basically.

Kashkari: You know, policymakers, excuse me, policymakers are human. And each has their own set of emotions and their own histories. And we do our best with the data that we have and the experiences that we’ve had.

Ryssdal: So it’s 50 years later, and you guys are still traumatized. I don’t think it’s too strong a word by what happened back then. I guess my question is: why?

Kashkari: Well, look at the experience that we’ve all had. For the 10 years before the pandemic, we struggled with inflation that was a little bit too low. We had this big flare up after COVID, after the reopening of the economy. And one of the things that we heard loud and clear from the American people is the American people hate high inflation. If their paychecks, their real earnings are going down because their paychecks are not keeping up with these higher grocery store prices, that really affects people’s quality of life and their standard of living. And so I think our fear of high inflation is well warranted. But we always have to look at both sides of the equation.

Ryssdal: Is it a fear that if you relax your guard here, that it will take off again and then get out of control? Is that what we’re talking about? Because nobody’s ever actually said that out loud. 

Kashkari: Well, out of control is the biggest fear. When we saw the 7, 8% inflation a couple of years ago, you bet we were very worried. “Oh, my gosh, what if it keeps climbing from here and we really can’t stop it?” And then the second question is, how much pain do we have to inflict on the economy. In the late 1970s, early 1980s, Paul Volcker and the Fed engineered a very deep recession, which ended up being necessary to put inflation back in the bottle. Thankfully, so far, we have not had to do that. We have a very strong labor market, we want to make sure that we land the plane completely and not let it flare up again.

Ryssdal: You know, you pointed out in a memo a couple of weeks ago that financial conditions — which is, you know, bonds and the stock market and all the rest of that stuff — it’s not really that tight given where the Fed is at 5.25%. 

Kashkari: That’s right. If we look at various financial indicators here, one of the places I look to right away to see how tight is monetary policy, is the housing market. And we know home sales have dropped a lot. But overall, investment in residential real estate has held up remarkably well. And remarkably, construction jobs have continued to climb. Normally, I would have thought raising rates this much would have led to a lot of losses of construction jobs. That makes me question, is monetary policy — do we have both feet on the brakes? Or just one foot on the brakes?

Ryssdal: Well, keep going on that. I mean, do you guys sit around the table at Federal Open Market Committee meetings and kind of shrug at each other and say, “Look, we’re trying, but the economy is just going, you know, great guns here.”

Kashkari: It is. I mean, in some sense, it’s a high-class problem, and we want the economy to be strong, but we keep getting surprised quarter after quarter at how strong GDP growth is, and how strong consumer spending is. Those are good problems to have. But it makes me question are we putting as much downward pressure on demand as we would have assumed, given where interest rates are?

Ryssdal: There will be industry types who will hear that last sentence you uttered, “Are we putting enough downward pressure on demand,” and they will hear, “Oh man, Kashkari is thinking a hike, he’s not thinking a cut.”

Kashkari: Well, I think the first question for me is, how long do we hold at these rates before we start cutting? That’s another way of putting more downward pressure is just holding at the current rate for longer. Actually having to raise rates, that’s yet another dimension, and I’m not there yet.

Ryssdal: I’m gonna go a little sideways here, but roll with me. The Fed is, generally speaking — this is an outsider’s impression — it is a fairly consensus-driven group, right? You guys strive to have a unified voice on monetary policy with the occasional dissent here and there, which is why it struck me that in a conversation you had Ginni Rometty, the other day, the former CEO and chairman of IBM, you said you — you, Neel Kashkari, I’m talking about you this time — you seek out conflict, whereas the Fed and its members are sort of more conflict-averse. And I guess I wonder what that translates into as you’re going around the table, because I always sort of imagined they were very cerebral, highbrow-ish kind of conversations. 

Kashkari: Well, the FOMC is incredibly cerebral, it is highbrow-ish. People are exceptionally well prepared. My nature is, if everybody has already reached a conclusion, there’s a good chance they’re right. But I want to examine the alternatives to see, hey, maybe their consensus is missing something. And so if you look at my eight, or I’m going on my ninth year at the Fed, I’ve been very willing to dissent if I have a different view than the center of the committee. Now, in recent years, during this COVID experience, the economy has been so hard to diagnose. It’s been hard for me to have conviction that I am right and everybody else is wrong. And I think that’s part of the explanation of why we’ve been so united in trying to get through this, because we’re all trying to figure it out. And it’s hard to know exactly which direction the economy’s going to go.

Ryssdal: If you guys can’t figure it out, what are the rest of us supposed to do? 

Kashkari: Well, I think we all are doing our very best. We’re doing our best at the Fed to get inflation back down and read the signals. And I know the American people are doing their very best to make ends meet. And I think if we all continue to do our best, we’re gonna get through this and get all the way back to where we need to get to.

Ryssdal: Do you get the frustration, though, that people have with high price levels, even though inflation is down by a lot?

Kashkari: Absolutely. I do the grocery shopping for my family. I started doing that when the pandemic hit, and I still have sticker shock. My my brain has not reset to the higher prices that I see, and in some cases, the smaller packages that I see every Saturday when I go to the grocery store.