Minneapolis Federal Reserve President Neel Kashkari expects the central bank to raise interest rates once more this year and again in 2027, marking a more hawkish outlook than he held just three months ago.
During a moderated conversation at the Council on Foreign Relations on Wednesday, Kashkari said he penciled in two rate hikes for 2026 in his submission to the Fed's September projections. The central bank delivered one in September. He sees another rate increase in 2026 and one more in 2027.
That represents a shift from June, when Kashkari said he expected just one rate increase this year and rates to remain unchanged in 2027. Kashkari cautioned Wednesday that his projections could change as new economic data arrive.
Kasikari questioned whether monetary policy is as restrictive as previously believed, pointing to strong corporate profits, low layoffs, and the booming financial markets as signs that financial conditions remain supportive.
"None of that suggests that financial conditions are restraining the economy or that monetary policy is tight," he said.
Kashkari raised his estimate of the neutral federal-funds rate-the rate that neither stimulates nor restrains the economy-to 3.25% in September. The rate could be temporarily higher, he said, as massive spending on data centers, power, and other AI infrastructure increases demand for investment capital.
But he remains cautious about how quickly AI could deliver a productivity boom and translate into stronger corporate earnings. History suggests transformative technologies often take longer than expected to generate large economic gains, said Kashkari, and a delayed payback of the massive investment could have broader economic consequences.
Bond markets may also be signaling that rates need to remain higher. Kashkari said the two-year Treasury yield was around 4.88%, compared with roughly 4.06% implied by the Fed's latest projections-a very large gap by historical standards. Kashkari said he is closely watching that signal, but also cautioned against blindly following the market.
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