Kashkari Calls for Gradual Rate Hikes to Contain Inflation, Dissents at Fed

Minneapolis Federal Reserve President Neel Kashkari on Wednesday renewed his call for the U.S. central bank to begin raising interest rates gradually, warning that delaying action risks entrenching inflation above the Fed's 2% target.

In a CNBC interview, Kashkari said he sees no evidence that current monetary policy is "particularly restrictive" on the economy. He pointed to strong corporate earnings, a resilient consumer, and a stable labor market as reasons to begin tightening.

"I look at this constellation and I say, what evidence do I have that monetary policy is particularly restrictive right now?" Kashkari told CNBC's Andrew Ross Sorkin from the Aspen Ideas Festival in Colorado. "So, I argued now is the time to start slowly moving up as we get more data in."

Kashkari was one of three dissenters at last week's Federal Open Market Committee meeting, where the majority voted to hold the benchmark policy rate in a range of 3.50% to 3.75%. He said he would have preferred a quarter-percentage-point increase. The three "no" votes were the first during Chairman Kevin Warsh's tenure, according to CNBC.

The FOMC has been on hold all year as officials debate policy direction with the labor market stabilizing but inflation running above the Fed's target. June inflation data showed some improvement as tensions in the Middle East eased and oil prices pulled back, but Kashkari said he remains uneasy.

He attributed persistent inflation to a series of supply shocks — the war in Iran being the most recent — as well as excess demand in some categories tied to the artificial intelligence technology investment boom.

"I'm not calling for a dramatic increase in interest rates," Kashkari said. "I'm simply saying I don't see evidence of monetary policy [being] marginally restrictive right now, and I think we have more work to do to get inflation back down. And I would rather get going now in small steps than wait till later, then we have a really entrenched inflation problem and have to raise rates aggressively."

He did not commit to a specific timetable but said a gradual approach could start as soon as the Fed's September 16-17 meeting, according to CNBC. Market pricing is tilted slightly toward a rate hike next month, with a better chance in October, CNBC reported.

Kashkari also addressed the Fed's communications strategy, offering a pointed view that diverges from Warsh's approach. He said it is valuable for the public and markets to understand how the Fed is likely to respond to economic developments — what officials call the "reaction function."

"I think there is value in continuing the tradition of explaining our reaction function to the public, and letting the public figure it out from there," he said, according to Reuters.

Warsh has personally stopped providing forward guidance about future Fed actions and has removed it from policy statements. He has set up five task forces to explore ways the central bank could overhaul how it conducts policy, including one dedicated to communications, with recommendations due by the end of 2026.

On the question of reducing the number of regularly scheduled Fed policy meetings — currently eight per year — Kashkari said he is "open-minded," noting that the Fed can always call emergency meetings if needed.

"My goal is not to slow the economy down," Kashkari said. "The goal is to get inflation back down to our 2% target."

His remarks come a day after Philadelphia Fed President Anna Paulson, who also has a vote on the FOMC this year, offered a differing view. Paulson told CNBC she sees evidence that the current interest rate level is "mildly restrictive" and favors holding steady. She said voting to hold was "not a close call" for her.

Kashkari said Warsh did not pressure him over his dissent. "He said to me, 'Do what you think is the right thing to do for the economy.' And I said, 'I really appreciate that,'" Kashkari told CNBC.