Minneapolis Federal Reserve President Neel Kashkari said he now expects the central bank to raise interest rates once before the end of the year — a reversal from his earlier projection for a cut. "I have one rate hike penciled in for 2026," Kashkari said, according to FXStreet, quickly adding a caveat: "It's a pencil, and so you know we're going to have to see how the data comes in."
From a cut to a hike
The shift matters because of where rates already sit. The federal funds rate — the overnight rate the Fed sets, which ripples out to the cost of mortgages, car loans and credit-card balances — is currently in a range of 3.50% to 3.75%. A hike would lift that by a quarter of a percentage point.
The logic is the central bank's basic lever: raising rates makes borrowing more expensive, which cools spending, which in turn eases the upward pressure on prices. Cutting rates does the reverse. For Kashkari to move from expecting a cut to expecting a hike, his read on the economy has tilted decisively toward "still too hot."
What changed his mind
Inflation. Core PCE — the Fed's preferred gauge, which strips out volatile food and energy to show the underlying trend — rose to 3.4% in May, its highest since October 2023, according to Yahoo Finance and the AP. That is well above the Fed's 2% target, where inflation has not durably sat for years.
Kashkari was clear that the pressure is broad, not just an oil-price story tied to the Middle East. He pointed to the spending boom on AI infrastructure and data centers as a force lifting costs across construction and materials. "Anything that touches those sectors," he said, "the prices are skyrocketing on those parts."
Not just one official
Kashkari's hawkish turn lines up with the wider committee. At its June meeting, the Federal Open Market Committee — the group of Fed officials that sets rates — held steady but revised its forecasts up sharply. The median projection for the year-end funds rate rose to 3.8% from 3.4% in March, implying at least one increase, and the median core-inflation forecast for the year was lifted to 3.3%, the official projections show. The committee also dropped softer forward-looking language in favor of a blunt line: it "will deliver price stability."
The yield puzzle
Here is the counterintuitive part. Even as near-term inflation runs hot and the Fed talks tougher, long-term bond yields have been falling. The explanation runs through how bonds work — and through the Fed's new leadership under Chair Kevin Warsh, who took over this spring.
Bond prices and yields move in opposite directions: when investors buy bonds, prices rise and yields fall. What drives long-term yields is not just today's policy rate but what investors expect inflation to average over many years. A market measure of expected inflation over the next decade has eased from above 2.5% in mid-May toward about 2.2%, The Globe and Mail reported. In plain terms, investors increasingly believe the Fed will succeed in getting inflation back to target, even if the path there is bumpy — so they demand less compensation for future inflation, and long-term yields drift down.
A J.P. Morgan strategist framed the dynamic around the new chair: "The Kevin Warsh era has begun, and this is a committee that is making an explicit intention to promote inflation-fighting credibility," in remarks summarized by Chase. That credibility — the market's trust that the Fed will do what it says — is doing some of the work that actual rate hikes have not yet had to do.
What comes next
Kashkari stressed flexibility, and the committee's own projections show rates easing again in 2027 and 2028 — a sign the penciled-in hike is seen as a one-off correction, not the start of a long tightening cycle. But all of that hinges on inflation cooling, which Kashkari said is not yet evident. For now the unusual mix holds: a Fed talking tougher, an official who has flipped to hike mode, and a bond market betting the inflation fight will be won.
