Kashkari Urges Gradual Rate Hikes Now, Dissents on Fed Hold

Minneapolis Federal Reserve President Neel Kashkari on Wednesday reiterated his call for the U.S. central bank to begin raising interest rates gradually, arguing that current policy is not restrictive enough to bring inflation back to the Fed's 2% target.

In a CNBC interview, Kashkari said he favors a series of small increases, potentially starting as soon as September, though he did not commit to a specific timetable. He was one of three dissenters at last week's Federal Open Market Committee meeting who voted for a quarter-percentage-point rate hike. The other nine voting members opted to hold the benchmark policy rate in a range of 3.50% to 3.75%.

"Corporate earnings are through the roof. They're doing great. The consumer is hanging in there. The labor market is hanging in there," Kashkari told CNBC's Andrew Ross Sorkin in a live interview from the Aspen Ideas Festival. "I look at this constellation and I say, what evidence do I have that monetary policy is particularly restrictive right now?"

He added: "So, I argued now is the time to start slowly moving up as we get more data in."

The FOMC has held rates steady all year as officials debate the appropriate policy stance. Inflation has remained well above the Fed's 2% target, though June data showed some improvement as tensions in the Middle East temporarily eased and oil prices pulled back.

Kashkari said he remains uneasy about the inflation outlook, which he attributed to a series of supply shocks — including the war in Iran — as well as excess demand in some areas 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."

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

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

The three dissenting votes were the first during Chairman Kevin Warsh's tenure. Kashkari said Warsh, who has expressed a preference for lower rates in the past, did not pressure him to vote with the majority. "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 said.

In the interview, Kashkari also weighed in on the Fed's communications strategy, a topic under review by a task force Warsh has established. Kashkari said clearly communicating the Fed's "reaction function" — how officials are likely to respond to economic developments — is valuable for markets and the public and should be continued. He contrasted this with so-called forward guidance, a more specific roadmap of future policy actions that Warsh has actively steered away from and which most Fed officials now view as best reserved for emergencies.

"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," Kashkari said.

Asked about a report that Warsh has floated the idea of reducing the number of regularly scheduled Fed policy meetings each year from the current eight, Kashkari said he didn't have a strong opinion. "I don't think there's any magic number about eight or 10 or six," he said, noting that the Fed can always call emergency meetings if needed.

Kashkari published a short essay on Friday outlining his case for gradual rate increases. He said the Fed's primary tool is interest rates, and that while most of the recent inflation has been driven by supply shocks, the central bank must still act to bring price growth back to target.

"We have one tool," he said. "Now I don't think most of the inflation that we've experienced is because of economic growth and robust demand. I think most of the inflation has been because of these successive supply shocks. There is a demand element layered on top of it as well, and nonetheless, it's the Fed's job to get inflation back down to our 2% target."

Markets are currently pricing a slight tilt toward a rate hike at the Fed's Sept. 15-16 meeting, with a greater chance of a move in October, according to CNBC.