Kashkari: Had expected one cut in 2026, now unsure

Kashkari: Had expected one cut in 2026, now unsure

Fed’s Kashkari Revises 2026 Rate-Cut Outlook Amid Strong Labor Market Data

Federal Reserve Bank of Minneapolis President Neel Kashkari has revised his stance on monetary policy, stating he previously anticipated one rate cut in 2026 but now expresses uncertainty, citing a resilient yet uneven labor market. This shift follows the January 2026 employment report, which added 130,000 nonfarm payrolls—surpassing expectations and reduced the unemployment rate to 4.3%.

The Federal Open Market Committee (FOMC) minutes from its January 27–28 meeting reveal a divided outlook. While most participants supported maintaining the federal funds rate target at 3.50–3.75%, two officials advocated for a 25-basis-point reduction. Kashkari, aligning with the broader committee, emphasized the need for caution, noting that "the labor market is softer but still decent to pretty good" amid mixed sectoral performance. Job gains were concentrated in healthcare and construction, while white-collar sectors and manufacturing showed weaker momentum, complicating assessments of overall strength.

The FOMC staff projects inflation will trend toward the 2% target as tariff-driven pressures wane, but uncertainties persist, including the pace of disinflation and potential risks from AI-driven automation and immigration constraints. Kashkari highlighted that "downside risks to employment have moderated, but the risk of more persistent inflation remains," underscoring the committee's balanced approach.

Market expectations for rate cuts have shifted significantly. The probability of a March cut has dropped to near zero, with the first potential reduction now priced for June 2026. Kashkari acknowledged the January data has "pushed rate-cut expectations to at least June," though he stressed that policy decisions will depend on incoming inflation data and labor market trends.

The Fed's cautious stance reflects a broader strategy to avoid premature easing, particularly after the 1970s-era missteps. Kashkari noted that while the labor market shows stabilization, “invisible unemployment” and sectoral imbalances remain concerns. The next FOMC meeting is scheduled for March 17–18, where officials will reassess the path forward.

For now, investors should expect a data-dependent approach, with the Fed prioritizing inflation control while monitoring labor market dynamics for signs of broader strength or fragility.