Kashkari Warns Inflation Pervasive, Not Limited to Energy

According to rate futures, markets continue to anticipate a hawkish Fed, with roughly a two-in-three probability that the policy rate will finish 2026 between 4.00% and 4.25%, and a solid chance of at least another quarter-point increase by mid-2027. This scenario should bolster the US dollar and leave rate-sensitive assets vulnerable, as traders are unlikely to believe the Fed will overlook the oil surge. For crude, the immediate impact is modest, so prices will probably continue to react to headlines about the Hormuz Strait and Saudi pipelines, although the combination of higher borrowing costs and an energy shock raises the possibility of weaker demand in the future. Kashkari's emphasis on services suggests that core and services inflation data could be as influential as oil for rate expectations.

---

Minneapolis Fed President Neel Kashkari contends that oil is merely one component of the inflation challenge, and since the Hormuz situation lies outside the Fed's control, its role is to address the wider price pressures that persist.

Summary:

• On Sunday, Minneapolis Fed President Neel Kashkari told Fox News that inflation remains excessive throughout the US economy, even when excluding volatile energy and food prices.
• He noted that price increases have spread to services and overall consumption, and while the Fed cannot use interest rates to reopen the Strait of Hormuz or reduce oil prices, it does have tools to combat broader inflation.
• Kashkari backed last week's unanimous decision to raise rates by a quarter point to 3.75%-4.00%, having previously dissented in favor of a hike at the prior meeting when rates were kept unchanged.
• With the exception of two, all Fed policymakers anticipate at least one additional quarter-point hike this year, while rate futures indicate a two-in-three probability that the policy rate will be between 4.00% and 4.25% by end-2026.
• Fed Chairman Kevin Warsh pegged inflation on the Fed's preferred measure at roughly 3.6% in August, with the official data expected later this month, and remarked that numerous categories are still increasing by over 3% on both six-month and 12-month bases.
• Kashkari described the US economy as resilient, pointing to robust growth and emerging signs of productivity improvement, and expressed hope that disinflation will prevail as geopolitical conflicts recede.

Speaking on Sunday, Minneapolis Fed President Neel Kashkari stated that inflation is excessive across every sector of the US economy, not just in oil, and contended that price pressures have extended into services and overall consumption. On Fox News' Sunday Morning Futures, he said that even excluding energy and food—categories he called volatile but still significant—inflation stays too high relative to the economy's trajectory.

Kashkari endorsed last week's unanimous vote to increase the federal funds target range by a quarter point to 3.75%-4.00%. He was among three officials who had dissented at the earlier meeting in favor of a hike, while the FOMC majority opted to hold rates steady. Projections accompanying the latest decision revealed that all but two policymakers anticipate at least one more quarter-point increase by year-end.

Regarding the oil shock, Kashkari stated that the Fed's mandate is to return inflation to its 2% target, and that interest rate adjustments cannot reopen the Strait of Hormuz or reduce oil prices. Crude prices have jumped following intensified hostilities, including US and Iranian attacks that sank some tankers in the strait, and Saudi Arabia's closure of its East-West pipeline after aerial strikes in the expanding Middle East conflict. He argued that the inflation Americans experience daily extends well beyond oil and is pervasive in the services sector, and that the Fed possesses tools to reduce it. He also expressed hope for assistance from other parts of government and the real economy.

Kashkari's comments largely mirrored those of Fed Chairman Kevin Warsh following Wednesday's meeting. Warsh estimated that inflation on the Fed's preferred gauge was probably around 3.6% in August, with the official data pending later this month, and noted that too many categories continue to increase by over 3% on both six-month and 12-month bases.

Kashkari also characterized the US economy as resilient in the face of the tariff and trade war and the conflicts in Ukraine and Iran, noting that growth has been solid and productivity is beginning to show improvement. He expressed hope that as these conflicts fade, growth will dominate and disinflation will ensue, thereby easing the Fed's task.