War Creates Uncertainty for Rate Path Says Fed's Kashkari (Full Panel)
Summary
- Geopolitical Shock: A new "President's war" has caused a hockey-stick spike in oil and gasoline prices, creating immediate inflationary pressure comparable to the Russia-Ukraine shock.
- Rate Path Uncertainty: Kashkari previously penciled in one rate cut for 2026, but this new commodity shock puts that on hold. He emphasizes that the "neutral rate" is likely higher than previously thought.
- AI vs. Housing: There is a massive capital reallocation occurring. Capital is shifting away from housing (apartment buildings) toward building AI data centers. This demand for capital keeps mortgage rates high.
- Labor Market Softening: For the first time in 10 years, businesses in North Dakota report being "fully staffed." Companies are using AI to avoid new hiring, suggesting organic labor demand is weaker than headline numbers imply.
- Fed Leadership Change: Discusses Kevin Warsh as the incoming Fed leader ("new boss"), noting Warsh favors a "scarce reserves" regime (smaller balance sheet), which implies tighter liquidity conditions ahead.
Trade Ideas
Kashkari states, "The president's war has obviously disrupted oil prices... That means gasoline prices go up. So that means inflation goes up." He notes a "hockey stick action in gasoline prices" over the last 24 hours. The Fed acknowledges this is a supply-side shock similar to Russia-Ukraine. If the war continues, oil supply remains constrained while risk premiums spike. This directly benefits the underlying commodity (USO) and the producers (XLE/CVX) who gain pricing power. LONG Energy to hedge against the "new shock" inflation. Rapid de-escalation of the conflict or demand destruction from a recession.
Kashkari admits he only had "one expected cut later on this year" prior to the war, but now "uncertainty" reigns. He explicitly states, "The neutral rate must be higher... mortgage rates are going to be higher than they otherwise would have been." A higher neutral rate combined with a new inflationary oil shock removes the possibility of near-term rate cuts. Furthermore, the potential transition to a "scarce reserves" regime under Kevin Warsh (mentioned later) implies less Fed buying of bonds. Higher yields = lower bond prices. SHORT Long-Duration Treasuries (TLT) as the "higher for longer" narrative is revitalized by war inflation. A severe economic crash (flight to safety) would bid up bonds despite inflation.
Kashkari shares a specific anecdote: "North Dakota is always structurally short of workers... [now] roughly half the businesses said we're fully staffed. That is the first time in ten years." He adds that businesses are using AI to "get by with what they have." If structurally tight labor markets are now "fully staffed" and companies are substituting AI for headcount, the organic demand for temporary staffing and recruitment is collapsing. This is a direct headwind for staffing agencies. SHORT Staffing Firms as the labor hoarding cycle ends and AI efficiency begins. Re-acceleration of the economy requiring human labor that AI cannot yet replace.
Kashkari argues that AI is "massively capital intensive" with "trillions of dollars going to build data centers." He explains that capital is being reallocated: "apartment buildings that would have been built... that capital is now going to shift over and build data centers." The Fed President is confirming a macro-level shift in capex. The winners are not just the chipmakers, but the physical infrastructure providers building the grid and cooling systems for these data centers. LONG Data Center Infrastructure (Industrials/Utilities) as the primary recipients of this capital shift. AI capex bubble bursting or regulatory crackdowns on energy usage.
