Kashkari and Paulson signal fewer reductions ahead and a tougher backdrop for borrowers
The Federal Reserve’s rate-cutting campaign in late 2025 and early 2026 appears to be nearing a pause, with two regional presidents signaling that borrowing costs might not fall much further.
For mortgage lenders and originators already navigating thinner margins and cautious borrowers, the message points to a more constrained rate outlook rather than a renewed easing cycle.
Minneapolis Federal Reserve president Neel Kashkari said he believed policy is now close to a level that neither spurred nor restrained growth as officials weighed stubborn inflation against a cooling labour market.
“My guess is we’re pretty close to neutral right now,” Kashkari said in a live CNBC “Squawk Box” interview.
“We just need to get more data to see which is the bigger force. Is it inflation or is it the labor market? And then we can move from a neutral stance, whatever direction is necessary.”
The Fed had cut its benchmark federal funds rate three times in 2025, leaving the target range at 3.5%–3.75%, only about half a percentage point above policymakers’ own estimate of neutral.
Kashkari said the economy’s resilience suggests policy has not been “putting that much downward pressure on the economy,” even as unemployment edged up to 4.6% and core inflation hovered around 2.8%, based on data whose accuracy had been questioned because of the government shutdown.
“I think inflation is still too high. And the big question in my mind is, how tight is monetary policy?” he said.
“Inflation risk is one of persistence, that these tariff effects take multiple years to work their way all the way through the system, whereas I do think there’s a risk that the unemployment rate could pop from here.”
Philadelphia Fed president Anna Paulson, speaking separately at the Allied Social Science Associations meetings in Philadelphia, also pointed to a slower pace of easing after last year’s 75-basis-point reduction.
“I see inflation moderating, the labor market stabilizing and growth coming in around 2% this year,” Paulson said.
“If all of that happens, then some modest further adjustments to the funds rate would likely be appropriate later in the year.”
Fed outlook narrows room for mortgage relief
For mortgage professionals, the signal from both officials is that policy makers intend to move cautiously after last year’s cuts.
Lenders have previously warned that only sustained, clearly telegraphed easing would unlock sidelined homebuyers and refinancers, particularly investors and higher-quality borrowers who remain sensitive to small moves in long-term yields.
Paulson described “cautious optimism on inflation” and said she wanted “greater clarity on what is pushing growth up and employment down.”
While the labour market is “clearly bending,” it is “not breaking,” she said, pointing to both supply and demand factors behind slower hiring and stressing that conditions merited close monitoring.
Kashkari, a voting member of the Federal Open Market Committee in 2026, underscores that future moves would hinge on whether inflation or employment poses the greater threat.
Meanwhile, Mike Fratantoni, SVP and chief economist with Mortgage Bankers Association (MBA), said the personal consumption expenditures (PCE) inflation data is well above the Fed’s stated goal of 2.0% inflation, and he thinks it will cause them to slow things down heading into 2026.
“These data, along with the recently released employment and CPI metrics, show an economy that is growing, but unevenly, and one where inflation is still running well above the FOMC’s target,” Fratantoni said.
“We forecast that the FOMC will be on hold at its January meeting, and will likely cut rates just once more next year.”
The split tone – wary of persistent price pressures but mindful of rising joblessness – suggests that mortgage rates might drift rather than plunge from here, leaving originators to compete on product structure, risk management and advice rather than expecting the Fed to reflate volumes.
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