Fed's Kashkari Projects One Interest-rate Hike This Year. Here's What Changed His Mind.

Doubts over the U.S.-Iran peace deal and the AI buildup mean a rate hike is possible, the Minneapolis Fed president says

Minneapolis Fed President Neil Kashkari.

Minneapolis Fed President Neil Kashkari said Friday that he's flipped his view on interest rates over the past three months.

In March, Kashkari said he was expecting the Federal Reserve might cut rates by a quarter of a percentage point. Now, he's penciling in one rate hike this year.

Kashkari is part of a tectonic shift at the Fed. In March, none of 19 Fed officials were expecting a rate hike this year. Now, 9 of 18 senior officials see at least one hike, with six seeing more than one increase. New Fed Chair Kevin Warsh didn't provide a forecast.

Markets have reacted to the shift: Investors now see a 67% chance of a rate hike, up from 25% at the start of June.

Fed communication is under the microscope. Warsh has previously criticized Fed officials for speaking too much.

Despite this criticism, Kashkari seemed comfortable sharing his views on inflation during a panel discussion at the Aspen Ideas Festival.

First of all, the Minneapolis Fed president, who is a voting member of the Fed's interest-rate committee this year, said he wasn't sure the fragile cease-fire with Iran would hold. Oil prices (CL00) (BRN00) have fallen sharply since the deal was announced last week.

"I don't trust Iran to honor whatever agreement has been made," Kashkari said.

"There's some evidence overnight that they're already reneging on it, so I certainly am not seeing 'all clear' coming out of the Middle East, and that makes me cautious about feeling too good that the worst is behind this," he added.

Iranian authorities have ordered at least three oil tankers transiting the Strait of Hormuz to turn back, while President Trump has said Iran violated the cease-fire with drone attacks on tankers.

Secondly, Kashkari said that "inflation is still too high" even if you take Iran and oil prices out of the equation,

"Core inflation is moving sideways or ticking up," he said. "Now, that's concerning. Might we have to raise rates from here? It is certainly possible; that's why I penciled in one dot, but we need to see how some of these other dynamics play out before I could give you any kind of certainty on that answer."

Thirdly, Kashkari said that inflation is also being driven by the hundreds of billions of dollars being spent on data centers and associated AI infrastructure.

"Anything that touches those sectors, the prices are skyrocketing," he said.

The Fed's standard textbook tells officials that labor costs fuel inflation. But this year, wages have been subdued and are not causing inflation, Kashkari noted.

This has sent the Fed back to the drawing board.

"We're having to re-examine even how we think about what causes inflation, and that makes it a particularly challenging analytical moment for us," Kashkari said.

Eventually, wages are going to rise as workers demand that they be able to meet their basic needs, the Minneapolis Fed president said. That might not push inflation higher, but "it may cause inflation to fall a little less quickly than it otherwise would," he added.

It is not only inflation causing interest rates to move higher. Kashkari said that all the borrowing for the AI buildout is pushing up the "neutral" interest rate - the interest rate expected to prevail when the U.S. economy is at full strength and inflation is stable.

"Part of the way the economy reallocates capital is through higher interest rates," Kashkari noted.

Mortgage rates being at at 6% or 6.5% are partially because there's a higher return for that capital to build data centers rather than apartment buildings.

"If there's massive investment going in now that wasn't there before, all else being equal, interest rates will be higher across the economy," Kashkari said. "So it probably means that interest rates that the Fed does set will be higher than they were before as we go through this buildout."

Over the longer run, AI may cool inflationary pressures with higher productivity. But Kashkari warned that it will likely take a lot longer to get to this "AI dream world" than forecasters are saying.

-Greg Robb

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June 26, 2026 16:27 ET (20:27 GMT)

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