Federal Reserve "Big Hawk": An inflation surprise must occur for a pause in rate cuts in December

In 2026, FOMC voting member and hawkish representative, Minneapolis Federal Reserve President Neel Kashkari stated that he will pay attention to the upcoming inflation data to determine whether it is appropriate for the Federal Reserve to cut interest rates again at its December meeting. When asked what might lead policymakers to pause rate cuts next month, he said, “There must be a surprise in inflation to significantly change the outlook.” Kashkari said on Tuesday at the Yahoo Finance Investment Conference, “If we see inflation unexpectedly rise between now and December, that could lead us to pause. It’s hard to imagine the labor market really heating up between now and December. There isn’t much time left.” The Federal Reserve lowered interest rates by 25 basis points last Thursday, marking the second consecutive rate cut. Although Fed officials suggested in their September forecasts that there would be rate cuts of 25 basis points at both the November and December meetings, investors have reduced bets on a rate cut at the last meeting of the year due to stagnant inflation progress and a strong economy. A recent report showed that the Fed's preferred core inflation measure saw its largest increase since April in September. The slowdown in hiring in October largely reflected the impacts of hurricanes and strikes. Consumer spending remains strong, and the U.S. economy expanded robustly in the third quarter. Kashkari reiterated that the economy is strong, but inflation has not yet fully returned to the Fed's 2% target. He stated that given the above-average pace of housing inflation, it may take one to two years for price increases to reach this target, although he described the cooling of inflation as “encouraging.” The Minneapolis Fed President indicated that with strong productivity growth, the neutral interest rate (the rate at which monetary policy neither stimulates nor restrains the economy) may now be higher. This could lead policymakers to lower interest rates less than previously expected in the coming months. Kashkari noted that while the exact level of the neutral rate is still uncertain, policymakers will have a better understanding of it over the next year. He added that the current policy is “moderately restrictive,” and that short-term borrowing costs continue to weigh on inflation and the economy, but not significantly. He said, “My judgment is that we are still in a moderately tightening stance, but ultimately the economy will guide us to lower interest rates further.”