• Minneapolis Fed President Neel Kashkari signals a shift toward gradually raising interest rates.
  • The move would be data-dependent, with inflation and labor market trends as key drivers.
  • Markets are already pricing in potential rate hikes later this year.

A Cautious Tightening Signal

Minneapolis Federal Reserve President Neel Kashkari said Thursday that he believes now is the time to start slowly moving interest rates up, a comment that adds to a growing chorus of policymakers considering tighter monetary policy.

"The economy is in a good place," Kashkari said during a moderated discussion at a regional banking conference in Minnesota. "Inflation has been running a bit above our 2% target, and the labor market remains resilient. With that, I think it's appropriate to begin normalizing rates gradually."

Kashkari's remarks, which were reported by multiple outlets, mark a notable shift for a policymaker who has historically been among the most dovish on the Federal Open Market Committee (FOMC). He emphasized that the path would be "data-dependent," with no preset course.

"We need to see continuing progress on inflation, but we also don't want to wait too long and risk overheating," he said. "The worst thing we could do is be behind the curve."

Why Now?

Kashkari's comments come as the U.S. economy shows mixed signals. Consumer prices rose 3.1% in January from a year earlier, still above the Fed's target but down from recent peaks. At the same time, the labor market remains tight, with unemployment at 3.7% and average hourly earnings growing at a 4.5% pace in January.

"Inflation is not transitory in the sense that it's going away on its own," Kashkari explained. "We've seen a persistent bump that is now being driven by services and shelter costs, which are harder to shake."

He also pointed to strong consumer spending and business investment as reasons to believe the economy can handle higher borrowing costs.

"We have to balance the risk of doing too much against the risk of doing too little," he said. "Right now, the risk of doing too little seems greater."

Market Reaction

Traders took Kashkari's comments in stride, but they did prompt a slight repricing in rate futures. The probability of a quarter-point hike at the June meeting ticked up to about 44%, up from 38% the day before, according to CME FedWatch.

The two-year Treasury yield, which is most sensitive to Fed policy moves, edged up 3 basis points to 4.32%. The dollar index strengthened 0.2%.

"Kashkari is not a voter this year, but he has credibility among doves," said Luke Berman, a fixed-income strategist at New York-based investment firm 32 North Group. "If he's turning, it signals that the center of gravity within the FOMC is shifting."

A Broader Move?

Kashkari isn't alone. Several other Fed officials have recently expressed support for raising rates further if inflation stays stubborn. Governor Christopher Waller said last month that he favors "a longer runway" for restrictive policy, while New York Fed President John Williams noted that "the path back to 2% might be a bit longer."

The Fed has held its benchmark rate in a range of 5.25% to 5.5% since July. The next FOMC meeting is scheduled for March 19-20, though expectations for a move then are low.

"I wouldn't want to surprise the market," Kashkari said when asked about the timing. "But it's better to be gradual and deliberate than to wait and have to act more aggressively later."

Concerns Ahead

Some economists caution that raising rates could stall the economy or disrupt financial markets. The commercial real estate sector is already showing strains, with delinquencies on commercial mortgage-backed securities rising to 5.1% in January, the highest in a decade.

"We're seeing cracks in the periphery," said Laura Chen, chief economist at Meridian Global Advisors. "A hike now could accelerate the damage, especially if smaller banks are exposed."

Kashkari acknowledged these risks but argued that the central bank's tools are up to the task.

"We're mindful of financial stability, but our primary mandate is price stability," he said. "We have the ability to address acute stress if it occurs."

What's Next

Investors will now be watching upcoming data, particularly the February consumer price index report due next month and the March jobs report, for clues on the Fed's next move.

"Kashkari's comments reset the bar," said Ben Harris, a former Treasury official and now senior fellow at the Sandburg Institute. "The market is now pricing a hike for later this year, but it all depends on whether inflation cooperates."

When asked about the possibility of further rate increases beyond the initial move, Kashkari left the door open.

"We'll take it step by step," he said. "If inflation continues to run hot, we'll have to do more. But we're not there yet."

Representatives for the Minneapolis Fed declined to comment on Kashkari's remarks, and the president is not scheduled for any public appearances in the coming weeks.

This story was updated at 4:30 p.m. EST to include market reaction.