U.S. Federal Reserve officials are increasingly signaling that further interest rate hikes may need to remain on the table as inflation pressures rise again amid prolonged conflict in the Middle East and surging oil prices.
On Tuesday, Minneapolis Federal Reserve President Neel Kashkari said inflation remains “far too high” and stressed that the Fed is “dead serious” about bringing inflation back down to its 2% target.
Speaking at a St. Paul Area Chamber event in Minnesota, Kashkari warned that the duration of disruptions in the Strait of Hormuz could have a major impact on inflation dynamics.
“We should not change the target itself,” Kashkari said. “We need to get back to 2%.”
He added that before the Iran conflict escalated, policymakers had been gaining confidence that inflation was gradually moving lower. However, he said the latest supply shock has “fundamentally altered the inflation environment.”
Kashkari also warned that even if the Strait of Hormuz reopens, it could take months for supply chains to normalize, allowing elevated energy prices to continue feeding inflationary pressures across the economy.
Regarding the labor market, Kashkari described conditions as “lukewarm,” saying employment remains resilient but no longer overheated.
He was one of three officials who dissented at the Federal Open Market Committee’s April meeting, arguing that the Fed should revise its policy statement to explicitly leave open the possibility of future rate hikes.
Kashkari also commented on the incoming leadership transition at the central bank, saying that even under incoming Fed Chair Kevin Warsh, achieving consensus on monetary policy decisions would remain difficult.
“The Fed chair sets the agenda and strongly influences the discussion,” Kashkari said. “But when it comes to rate votes, the chair is still only one of 12 voters.”
Also on Tuesday, Boston Federal Reserve President Susan Collins publicly acknowledged the possibility of future rate increases during an interview with The Wall Street Journal.
“It’s not the baseline scenario right now,” Collins said, “but a more persistent inflation scenario is possible, and in that case rate hikes may become necessary.”
Collins identified rising inflation expectations among households and businesses as one of the biggest risks facing policymakers.
She said officials are closely monitoring whether higher energy prices begin spreading into broader goods and services inflation.
Collins also noted that rising inflation mechanically lowers real interest rates, potentially easing financial conditions even if the Fed does not formally change policy.
Analysts say sentiment inside the Fed has become noticeably more hawkish in recent weeks as policymakers grow increasingly concerned that energy-driven inflation could spill into the broader economy.
At the Fed’s April policy meeting, officials recorded the highest number of dissents since 1992. Some policymakers also pushed to remove longstanding language implying that the Fed’s next move would likely be a rate cut.
Collins confirmed she supported removing that easing bias from Fed communications.
“At this stage,” she said, “a more neutral and agnostic communication approach is appropriate.”
