Kashkari shifts from penciling in a cut to a hike as broader inflation pressures build beyond just energy prices
A Federal Reserve voting member who expected rate cuts earlier this year now expects a hike before 2026 is out.
Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, said Friday at the Aspen Ideas Festival that he has revised his forecast for 2026 and now expects the central bank to raise rates before year-end, a reversal from the cut he had been projecting as recently as March.
"In March, I had penciled in one rate cut by the end of the year. In June, I've changed that to one rate hike by the end of the year," Kashkari said, as quoted in a CNBC article published Friday. "It's a pencil, and so we're going to have to see how the data comes in."
The shift tracks with where the broader committee landed at the June meeting. Nine of the 18 officials who submitted projections indicated the federal funds rate would finish 2026 above its current range of 3.50% to 3.75%, with the median year-end estimate rising to 3.8% from 3.4% in March. Kashkari is a voting FOMC member this year, which gives his call added weight.
He has been moving in this direction for a while. At the April meeting, Kashkari dissented from the committee's policy statement, arguing that language signaling future cuts should be removed given the inflation picture.
Beyond energy prices
Kashkari's Aspen remarks stood out because he is not pointing at energy prices alone. He said inflation is showing up more broadly across the economy, driven by tariffs, supply chain disruptions, and the ongoing ripple effects of the Iran conflict on global commodity markets.
"The inflation is being driven by supply dynamics, so whether it's tariffs pushing up the price of goods that we buy from abroad, it's the fertilizer that's been disrupted because of the Strait of Hormuz, and energy and oil prices from the Strait of Hormuz," he said.
His remarks come a day after Thursday's personal consumption expenditures (PCE) report, the Fed's preferred inflation measure, showed core prices up 0.3% in May and 3.4% over the past 12 months, more than double the central bank's 2% target.
Odeta Kushi, deputy chief economist at First American in Washington, D.C., said the rate conversation has shifted in a way few people anticipated at the start of the year.
"A rate hike is not inevitable, but it's no longer unthinkable," Kushi told Mortgage Professional America. "Earlier this year, the market's base case was that the Fed would be cutting rates. Today, the conversation has shifted toward how long rates may need to remain elevated and whether inflation risks could eventually require a different policy response."
On the question of whether inflation stays contained in energy or spills over more broadly, Kushi said that is what will ultimately drive the Fed's next move.
"If inflation remains concentrated in energy and core inflation stays relatively contained, the Fed can remain patient," she said. "If higher energy costs begin feeding into transportation, goods, services, and inflation expectations, the conversation changes."
What it means for brokers
Kashkari is not alone in moving hawkish. CNBC reported that New York Fed President John Williams said Thursday he expects inflation to ease and sees current policy well-positioned, while Chicago Fed President Austan Goolsbee said he remains concerned about inflation but declined to speculate on where rates are heading.
Bank of America revised its outlook this week to call for three hikes by year-end and no cuts until 2028.
The 30-year fixed has been running around 6.5%, and with the dot plot already pointing toward at least one hike, there is not much in the data right now to give buyers on the sidelines a reason to move. Kushi said the second half of the year is not shaping up to be the relief the market has been waiting for.
"The more likely story for the second half of the year is volatility around a higher-for-longer range, rather than a meaningful decline in mortgage rates," she said. "If inflation remains sticky and investors continue to demand compensation for inflation risk, mortgage rates may stay elevated."
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