Minneapolis Fed president Neel Kashkari said Tuesday that he believes interest rates will likely need to be held at current levels for an "extended period" and didn't rule out a hike if inflation stalls near 3%.
"I think it’s much more likely we would just sit here for longer than we expect or the public expects right now until we see what effect our monetary policy is having," Kashkari said at the Milken Institute conference in Los Angeles.
But if the Fed were convinced that inflation was entrenched at 3% and rates needed to be raised higher, it is possible it would take such an action.
"That's not my most likely scenario, but I also can't rule it out," he said, adding, "I think the bar for us raising is quite high but it's not infinite. There is a limit when we say, 'OK, we need to do more.'"
A cut in rates is also possible, he noted, if inflation starts to come down again, or there is marked weakening in the labor market. He said he would need to see multiple inflation reports that indicate inflation is dropping back toward the Fed's goal of 2%.
Kashkari is the third policymaker in two days to say that a rate hike is not the base case scenario. New York Fed president John Williams and Richmond Fed president Thomas Barkin also offered assurances Monday that the Fed's next move isn't a rate hike.
The commentary comes after the Fed’s interest rate-setting committee decided last week to keep its benchmark rate in a range of 5.25%-5.50%, a 23-year high, at the conclusion of its two-day policy meeting.
The fed funds rate has been in this range since July 2023.
The committee said in its latest policy statement that "in recent months, there has been a lack of further progress toward the Committee’s 2 percent inflation objective."
Officials reiterated more clarity would be needed in the outlook for inflation returning to target before cutting rates.
Inflation has shown a lack of progress in the first three months of the year after a steady decline in the second half of last year.
"The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent," the statement read.
But Fed Chair Jay Powell soothed markets by making it clear in a press conference Wednesday that "it is unlikely the next policy move will be a hike."
Kaskkari in March said he estimated that there would be two rate cuts this year, but he said Tuesday that he needs to see more data before the Fed’s next policy meeting in June to decide whether he will keep that prediction or scale it back to one or none.
"It’ll be two rate cuts or less," he said.
Kashkari posited that higher rates aren’t passing through to housing as quickly as they otherwise would because many Americans locked in pandemic-era low rates on their homes.
"It may take longer for monetary policy to be fully felt by the housing market and by the economy more broadly," he said.
"So that may guide us towards being more patient in seeing the effects of our policy action."
Kashkari is keenly watching inflation, the job market, and the housing market for whether to raise rates. He pointed out the new lease rates seem to have bumped up in the last month or two, which he says is a little bit concerning.
He said he wonders why that’s the case since the Fed is putting so much downward pressure on real estate.
"The housing market has remained far more resilient than I would have guessed," he said.
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