Kashkari backs gradual rate hikes as inflation stays above 2%

Minneapolis Fed President Neel Kashkari said the time has come to begin moving rates higher gradually, as inflation stays well above the central bank's 2 percent target and energy costs climb on Middle East conflict.

"Now is the time to start slowly moving" rates up, Kashkari said in remarks reported Wednesday, adding that he favored a 25-basis-point increase at the July Federal Open Market Committee meeting.

The FOMC instead held the federal funds target range at 3.50 percent to 3.75 percent for a fifth consecutive meeting, with Kashkari joining Cleveland Fed President Beth Hammack and Dallas Fed President Lorie Logan in dissenting. The last rate change came in December 2025, when the committee cut by 25 basis points. Three dissents among the 12 voting members is an unusually high number for the rate-setting panel, a sign that internal consensus on the inflation path is fracturing.

The split signals growing impatience with inflation that remains "elevated relative to the Committee's 2 percent goal," per the FOMC's policy statement, which cited supply shocks from the Iran conflict driving energy prices higher. The national average for a gallon of gas topped $4 last week, and global oil briefly breached $100 a barrel. June inflation data showed consumer prices easing, which had led economists to expect a hold, but the dissent count suggests the committee's tolerance for above-target inflation is wearing thin.

"The Fed appears to be running out of patience with above-target inflation, despite recent data coming in cold," Kay Haigh, global head and CIO of fixed income and liquidity solutions at Goldman Sachs Asset Management, said in an email following the decision. "The committee's growing hawkish sentiment, shown by the three dissents against today's hold, has also likely been exacerbated by the recent flare-up in hostilities in the Middle East."

The debate over whether to hike now or wait reflects a fundamental disagreement about how to handle supply-driven inflation. "When you have a supply shock like the Iran War, the textbook says don't raise rates unless inflation expectations are rising because the inflation will not become entrenched and it'll fade once the shock is over," Mark Zandi, chief economist at Moody's Analytics, said prior to the Fed's decision. "I think that argument still wins the day."

September Meeting Looms as the Next Test

The probability of a rate hike is rising, especially if the conflict persists and oil prices continue to trend higher, said Brian Therien, senior analyst at Edward Jones. Gregory Daco, chief economist at EY-Parthenon, said the key question is what happens in the Middle East, which will be the key driver of headline inflation. Daco expects the Fed would likely hike at its September meeting if inflation were to reaccelerate.

The artificial intelligence boom is also driving up costs for memory chips, consumer electronics, and electricity, according to Daco, adding another layer of price pressure beyond energy. The last time the Fed faced a similar supply shock with multiple dissents was during the 2022 tightening cycle, when the committee ultimately delivered consecutive 75-basis-point hikes. The current situation differs in that the economy is growing at a solid clip, per the FOMC statement, even as the conflict injects uncertainty into the outlook.

Fed Chair Kevin Warsh has voiced commitment to restoring price stability but has been more tight-lipped than his predecessors about rate decisions and next steps. President Trump has urged the Fed to cut rates, telling reporters Tuesday, "We should have the lowest interest rate in the world." The political pressure adds another layer of complexity to the committee's deliberations, with the White House pushing for easing while inflation data argues for restraint.

Market pricing suggests investors see a pause as more likely than a hike at the next meeting, though the possibility of a cut is being considered but not strongly anticipated. The fed funds futures market will be closely watched for shifts following Kashkari's remarks and the dissent pattern. If inflation reaccelerates in August data, the September meeting could see the first hike since the 2023 tightening cycle ended. Conversely, if the U.S.-Iran pause leads to a longer ceasefire and oil prices remain lower, the inflation outlook could become more balanced, giving the committee room to hold.

This article is for informational purposes only and does not constitute investment advice.