Fed's Kashkari: Two More 25-basis-point Cuts Would Be Appropriate For This Year

Neel Kashkari, President of the Minneapolis Federal Reserve, expressed his support for the Fed's decision to cut interest rates by 25 basis points this week and stated that it would be appropriate to implement another rate cut of the same magnitude at each of the two remaining meetings this year.

Kashkari noted that back in June, he had believed that only two 25-basis-point rate cuts would be needed for the entire year. However, since then, U.S. job growth has significantly slowed—a phenomenon that can only be partially attributed to reduced immigration and is more likely reflective of weakening labor demand—which prompted him to change his view.

"I believe the risk of a sharp increase in unemployment warrants the committee taking some action to support the labor market," Kashkari said, adding that he currently sees a low risk of tariffs causing a significant surge in inflation.

"Unless there is some large increase in tariff rates from here or some other supply-side shock, it is hard for me to see inflation climbing much higher than 3% given announced tariff rates and the relatively small share of imported goods in overall U.S. consumption," he stated.

The total value of U.S. imports accounts for approximately 11% of the country's GDP.

Previously, due to concerns that former President Donald Trump’s tariff policies could reignite inflation, the Fed had kept rates unchanged in five consecutive meetings since December of last year.

However, following a sharp slowdown in the latest employment data and a rise in the unemployment rate to 4.3%, the Fed announced a 25-basis-point rate cut on Wednesday, lowering the target range for the federal funds rate to 4%–4.25%. Markets widely expect policymakers to implement another 25-basis-point cut at each of the two remaining meetings this year.

The rate cut was largely in line with market expectations. Aside from new Governor Stephen Milan, who dissented in favor of a larger cut, and one non-voting regional Fed president who preferred to keep rates unchanged, most Fed officials supported the decision.

Nevertheless, the Fed’s next steps remain uncertain. Fed Chair Jerome Powell said on Wednesday that this is a "difficult situation" because unemployment could rise. Still, inflation could also rebound, forcing the central bank to balance between these two risks.

Kashkari explained that, for him, the more likely risk is a further rapid weakening of the labor market. Therefore, he believes the Fed should lower the policy rate to the 3.50%–3.75% range by the end of this year.

He also stated that if the labor market performs more strongly or inflation surprises to the upside, the Fed should be prepared to pause rate cuts, keep rates steady, or even raise them again if necessary. Conversely, if the labor market deteriorates faster than expected, the Fed should accelerate the pace of rate cuts.

According to the dot plot released on Wednesday, Kashkari’s view of "two more rate cuts this year" is shared by eight other Fed officials. However, another eight officials believe the Fed may need only one more rate cut or no further cuts at all, reflecting greater caution about inflation.

Kashkari added that he now estimates the neutral interest rate has risen to 3.1%, meaning current Fed policy is not as restrictive as he previously thought.

He also noted that even if the Fed enters a rate-cutting cycle, long-term interest rates may not decline significantly, which would limit the boost to the housing market.