• Minneapolis Fed President Neel Kashkari says the central bank should keep both rate hikes and cuts on the table, emphasizing data dependence.
  • His comments reflect internal debate about whether inflation will stay above target or cool enough to allow easing.
  • Markets may face increased volatility as they parse ambiguous forward guidance from Fed officials.

No Pre-Commitment From the Fed

Federal Reserve Bank of Minneapolis President Neel Kashkari struck a notably open-ended tone on Thursday, suggesting the central bank should signal that its next policy move could be either a rate increase or a cut, depending on incoming economic data. Speaking at a conference in Minneapolis, Kashkari argued that the Fed must avoid locking itself into a single path given persistent uncertainty about inflation and the labor market.

"We need to be prepared to move in either direction," Kashkari said, according to prepared remarks. "The data will guide us, not a preset course." His stance underscores the balancing act facing Fed officials as they weigh still-elevated price pressures against signs of a softening economy.

Inflation and Labor Data in Focus

Kashkari pointed to two key drivers for the next move: inflation and employment. If price increases prove stickier than expected, the Fed may need to hike rates further to cool the economy. Conversely, if the labor market weakens significantly, the central bank could pivot to cuts to support growth. Recent payrolls have shown resilience, but some regional surveys hint at slowing demand.

"We're not there yet on inflation," Kashkari noted. "But we also have to be mindful of the lag effects of our past tightening." He said officials will closely watch upcoming consumer price index reports and jobless claims.

Market Implications

Investors interpreted Kashkari's comments as a signal that the Fed's forward guidance may become more ambiguous, which could increase volatility in interest-rate-sensitive assets. Bond yields whipsawed following his remarks, with the 2-year Treasury yield briefly rising before settling. The dollar index was little changed.

"This kind of messaging keeps the market on edge," said a fixed-income strategist at a major bank. "Any data surprise could trigger a sharp repricing."

A Deliberate Strategy

Kashkari's suggestion also reflects a broader Fed strategy to avoid repeating past mistakes of committing too early to a direction. In 2021, the central bank was criticized for signaling that inflation would be transitory, only to be forced into a rapid tightening cycle.

"We learned the hard way that humility is key," Kashkari said. "We need to communicate that we are truly data dependent."

What's Next

Fed Chair Jerome Powell is expected to address the issue in his upcoming press conference. Markets are currently pricing in roughly equal odds of a cut or a hold at the next meeting, according to fed funds futures. A surprise move in either direction could roil global markets.

We attempted to reach additional Fed officials for comment but did not receive a response before publication.

Correction: A previous version of this article incorrectly stated that Kashkari is a voting member of the FOMC this year. He is not. The text has been corrected.