Key Takeaways:
Minneapolis Fed President Neel Kashkari flipped from forecasting a rate cut to a rate hike in a stark reversal of his 2026 outlook, citing the need to assess the effectiveness of operating without forward guidance.
Federal Reserve Bank of Minneapolis President Neel Kashkari said Friday he now expects the central bank to deliver one interest-rate increase this year, a dramatic shift from his March projection of a single cut before year-end. The fed funds rate has been held at 5.25% to 5.50% since July 2023, the highest level in more than two decades, as the Fed has maintained its restrictive stance through 15 consecutive meetings without a change.
"In March, I originally anticipated we'd cut once by the end of the year. By June, I had revised that to one hike before year-end," Kashkari said in remarks. "We need to see how effective no forward guidance is." The Minneapolis Fed president, who was the sole dissenter against the Fed's December 2023 dot plot that penciled in three cuts for 2024, has consistently been among the more hawkish members of the rate-setting committee.
The reversal aligns with a broader repricing in rate expectations. Overnight index swaps now price roughly 12 basis points of tightening by the December 2026 meeting, compared with more than 75 basis points of cuts priced at the start of the year. The shift has been driven by sticky inflation — the Fed's preferred gauge, the core PCE deflator, has run above 3% for five consecutive months — and a labor market that added 172,000 jobs in May, well above the 85,000 consensus estimate.
Treasury yields moved higher across the curve following Kashkari's comments, with the 2-year note climbing 4 basis points to 4.09% and the 10-year yield rising 3 basis points to 4.37%. The dollar index held near 101.20, while USD/JPY pushed toward 161.74, within striking distance of the 162 level that has historically triggered verbal intervention from Japanese authorities. The S&P 500 traded little changed at 7,368, paring earlier gains as rate-sensitive sectors including real estate and utilities slipped.
Kashkari's hawkish turn comes as the Fed's June Summary of Economic Projections showed median officials projecting one 25-basis-point cut in 2026, down from three cuts in the March SEP. The dot plot revealed a widening divergence among policymakers: seven of 19 officials saw no cuts this year, while four projected two or more. The last time the Fed's SEP shifted from cuts to hikes mid-cycle was in 2022, when the central bank accelerated its tightening campaign after initially signaling gradual normalization.
The implications extend beyond short-term rate expectations. A rate hike in 2026 would mark the first increase since the Fed's final 25-basis-point move in July 2023, breaking the longest pause in the tightening cycle's history. For risk assets, the repricing has already begun: the S&P 500 is down 3.2% from its June 12 record high, while the Bloomberg U.S. Aggregate Bond Index has posted negative total returns in four of the past five weeks. The next FOMC meeting is scheduled for July 28-29, where the fed funds rate is expected to remain unchanged.
This article is for informational purposes only and does not constitute investment advice.
