• Minneapolis Fed President Neel Kashkari said the U.S. economy and consumers remain surprisingly resilient, even as inflation holds near 3%.
  • He reiterated that another rate hike could be appropriate if growth and price pressures persist, signaling no rush to ease policy.
  • Recent data show Q2 GDP grew at a 2.2% annualized pace, while core PCE inflation was 3.0% year over year in August.

Resilient Economy Defies Expectations

Speaking at the Council on Foreign Relations in New York on September 30, Federal Reserve Bank of Minneapolis President Neel Kashkari said the U.S. economy “keeps surprising me how resilient it is.” His remarks underscore a growing conviction at the central bank that despite higher interest rates, persistent inflation, tariffs, and geopolitical disruptions, demand and output remain robust.

Kashkari emphasized that inflation is still around 3% by key measures and that one softer inflation report did not materially change his assessment. He also rejected the notion that artificial-intelligence infrastructure construction alone is sustaining the economy, pointing instead to solid profits across multiple sectors and ongoing household demand.

The latest official data support his view. U.S. real GDP grew at a 2.2% annualized rate in the second quarter, revised up from earlier estimates, with consumer spending, investment, and exports all contributing. First-quarter growth was revised to 2.5%. Meanwhile, August headline PCE inflation was 3.4% year over year, while core PCE, the Fed’s preferred gauge, came in at 3.0%. On a monthly basis, headline PCE rose 0.3%. Current-dollar consumer spending increased by $190.8 billion in August, with gains in both goods and services.

No Rush to Cut Rates

The implications for monetary policy are clear: there is less urgency for the Federal Reserve to ease. Kashkari still sees inflation as too high and has indicated that another rate increase could be appropriate if growth and price pressures remain firm. The Federal Open Market Committee raised its policy-rate target by 25 basis points in September, to 3.75%–4.00%, its first hike since 2023. The updated median projections pointed to one more increase in 2026 and no cut in 2027.

Kashkari’s stance is not isolated. The Fed’s September projections imply a higher-for-longer rate environment, with the median policy-rate forecast near 4.1% at end-2026 and remaining there in 2027. Inflation is not expected to reach the 2% goal until 2029.

Inflation Risks Beyond AI

Kashkari has previously highlighted several factors complicating the inflation outlook. Trade and tariffs remain relevant to prices, supply chains, and business investment, though research from the St. Louis Fed suggests tariff-related upward pressure on U.S. inflation moderated in the first half of 2026. Geopolitical conflicts involving Ukraine and Iran add energy-price uncertainty, which can lift both headline inflation and long-term interest-rate expectations. Simultaneous changes to immigration and tax policies further muddy the Fed’s judgment about whether inflation or employment poses the greater risk.

The AI and data-center buildout has helped support investment and growth, but it has also fueled debate over whether expansion is broad-based or overly reliant on technology capital spending. Kashkari’s public view is that growth is more broadly supported than that narrative suggests.

Market Reaction and Global Spillovers

Financial markets have reflected this tension. After softer inflation data, short-term Treasury yields declined as investors trimmed expectations of an immediate additional hike, while longer-term yields remained high amid concern that inflation, growth, and government borrowing needs could keep rates elevated for longer. Global bonds had their worst month in years, and the 10-year Treasury yield rose sharply over September. The dollar had its best month since March as higher U.S. yields attracted global capital, tightening financial conditions beyond the United States and potentially adding pressure to countries and companies that borrow in dollars.

A “resilient” economy has mixed consequences. Workers benefit from continued hiring and consumption, with Kashkari characterizing the labor market as “pretty good,” though not exceptional. Households face steady employment but also roughly 3% core inflation, which means essentials and services continue to cost more over time. Higher rates also raise borrowing costs for mortgages, auto loans, credit cards, and other consumer debt. Businesses see solid demand and strong profits, but prolonged elevated rates make capital investment and refinancing more expensive, especially for smaller or highly indebted companies. Savers and retirees may benefit from higher yields on cash and new fixed-income investments, but inflation erodes purchasing power.

What to Watch

An upcoming employment report and subsequent inflation releases will be pivotal. Continued strong job growth, spending, or wage pressure would reinforce the case for another hike. Conversely, a sustained decline in core inflation, weaker labor data, or slowing consumption could make the Fed pause. Kashkari’s stated baseline is conditional, not guaranteed: he expects another increase depending on how the economy performs.

Longer term, if productivity gains from AI and investment spread across the economy, the U.S. may be able to sustain stronger growth without generating as much inflation. Kashkari has cited signs of productivity improvement as a constructive possibility. The adverse alternative is that tariffs, energy shocks, fiscal pressures, or a reacceleration in demand leave inflation stuck around 3%, requiring more tightening and increasing recession risks later.

Correction: An earlier version of this article misstated the date of Kashkari’s remarks. He spoke on September 30, not September 29.