If the U.S. wants to achieve the highest level of employment the economy can sustain, Minneapolis Federal Reserve Bank President Neel Kashkari says early childhood education is essential.
Speaking at the Greater Kansas City Chamber of Commerce Leadership Exchange in St. Paul, Minn., on Monday, President Kashkari said that the Minneapolis Fed has been studying the effects of access to early childhood education for years and has found that it is an essential component to maintaining strength in the U.S. labor market.
“Education is enormously important to maximum employment,” Kashkari said. “If you want to have more Americans gainfully employed, hopefully in good jobs, contributing to our society, obviously, education is absolutely a critical issue.”
Kashkari — who has a 5-year-old daughter who just started kindergarten and a 3-year-old son who attends daycare — says that Fed researchers have found that one of the best uses of taxpayer money is to spend money on providing low-income families with access to high-quality childcare and pre-kindergarten. Early education is not only an important boost for current labor participation, but it also can help improve the workforce of the future.
“One of the most common pieces of feedback I get from the business community in this region is that we are structurally low on workers,” Kashkari said, adding that the current education system is not serving everybody equally and some people are being left behind.
The issues surrounding the dearth of options and high costs of childcare are well-known to parents nationwide. In fact, childcare costs have grown in excess of inflation for the past 20 years. The annual cost for home-based and center-based childcare averaged $11,582 per child in 2023, according to calculations based on data released by Child Care Aware of America, a nonprofit that works with childcare resource and referral agencies. That is up from an average annual cost of $9,397 in 2017.
That has played a huge role in the overall price of parenthood growing prohibitive. Barron’s reported recently on why that is bad news for the overall economy — not just in the form of a shrinking labor supply. The economic consequences of the high costs involved in raising children today range from falling fertility rates, diminished productivity and innovation, and declining wealth. All of that could threaten the U.S. economy’s long-term growth and vitality.
“If you think about all the tough challenges that we face as society, this is probably the one that is easiest to get behind,” Kashkari said, adding that it makes sense intuitively to give children a fair chance at a good education, so then they can get a good job and contribute. While some states and communities have passed legislation and started programs in recent years to address the issue, finding solutions at the federal level remains at an impasse.
Kashkari — typically a more hawkish member of the Federal Open Market Committee — also took time on Monday to explain why he supported the Fed’s recent decision to lower the target range for the federal-funds rate by half a percentage point.
In an essay published Monday, Kashkari said he feels the risk that the labor market could deteriorate further now outweighs concerns that inflation will accelerate at this point.
“In my judgment, cutting the policy rate by 50 basis points last week was the right decision — one that reflects both the substantial progress we’ve made in lowering inflation and also the softening of the labor market. Even after that cut, the overall stance of policy remains tight,” Kashkari wrote.
The “single best proxy for the overall stance of monetary policy,” according to Kashkari, is the 10-year Treasury inflation-protected securities yield. At the height of the tightening cycle in October 2023, the 10-year real yield peaked at around 2.5%, he noted. It has fallen to 1.6% after the FOMC cut the fed-funds rate by half a percentage point. “Thus, policy remains tighter now than immediately before the pandemic but has relaxed relative to its peak,” Kashkari said.
Since last week’s FOMC meeting, Fed officials have seemingly focused on preparing investors for a steady pace of cuts over the course of the next few meetings. That said, they have made clear that a 50 basis-point cut is unlikely to be the default. Instead, most economists and analysts believe officials will likely follow their so-called dot-plot projections and cut a quarter of a percentage point in the November and December meetings unless the job market deteriorates markedly.
“Our path forward will depend on the totality of the incoming data for economic activity, the labor market and inflation,” Kashkari said. “Ultimately this will guide us to where the policy rate eventually settles.”