Kashkari's Rate Hike Outlook
Minneapolis Fed's Kashkari shifts to projecting rate hike by 2026 amid persistent inflation
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Key Points
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Kashkari used the phrase, 'It's a pencil, and so you know we're going to have to see how the data comes in,' to describe his forecast as tentative and data-dependent.
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He has shifted to penciling in one rate hike by end-2026, rather than a year-end move in 2025 as previously discussed.
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Fed projections show that nine of the 18 policymakers expect at least one rate increase by the end of the year.
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Kashkari highlighted AI-related demand, noting hundreds of billions of dollars annually flowing into AI data-center construction and related infrastructure as a major inflation driver.
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The remarks occurred on a panel at the Aspen Ideas Festival in Colorado, where he discussed the outlook and data-dependence of his stance.
Minneapolis Fed President Neel Kashkari has flipped his forecast — dropping his call for a rate cut and now penciling in one rate hike by the end of 2026. He made the announcement at the Aspen Ideas Festival in Colorado on June 26, citing stubborn inflation and a boom in AI data-center construction as the key drivers. MarketWatch reported his remarks sent Treasury yields higher as they spread across markets.
The Fed's preferred inflation gauge hit 4.1% annually in May 2026, well above the 2% target. Core PCE — which strips out food and energy — came in at 3.4%, the highest since late 2023, according to Yahoo Finance. The Fed held rates steady at its June meeting, but Kashkari's comments signal the tightening cycle may not be over.
Kashkari Shifts from Cuts to Hikes
As recently as early 2026, Kashkari expected rate cuts. Now he has changed course. "It's a pencil, and so you know we're going to have to see how the data comes in," he said at the Aspen panel. "But right now, I've shifted to penciling in one rate hike by the end of the year." He was careful to stress the forecast is not set in stone and will change if the data changes.
Kashkari is not alone inside the Fed. According to IndexBox, nine of the 18 policymakers on the Federal Open Market Committee now project at least one rate increase before year-end 2026. That is exactly half the committee — a sharp shift from earlier projections that pointed toward cuts.
AI Data Centers Are Driving Up Prices
Kashkari pointed to one unusual inflation driver: the massive build-out of AI infrastructure. Hundreds of billions of dollars are flowing annually into AI data-center construction. That spending is pushing up the cost of copper, electricity, and construction labor. Unlike past tech booms driven by software, this one is intensely physical — and it shows up in prices.
Yahoo Finance reported that Kashkari called this a major force the Fed must account for. He noted that tech giants are spending at a scale that is largely insensitive to interest rates. That makes it harder for the Fed to cool inflation using its traditional tools.
Iran Conflict Adds Uncertainty to Inflation Outlook
Beyond AI, Kashkari flagged the ongoing conflict with Iran as a wild card. He said he does not trust Iran to honor any agreements. The conflict adds a persistent risk premium to global energy prices. Kashkari also cited rising fertilizer and energy costs as pass-through risks — meaning those higher costs eventually show up in everyday prices for consumers.
Crypto Briefing noted that Kashkari described the Iran situation as adding uncertainty to an already complicated inflation picture. Higher energy prices can ripple through the entire economy, hitting food, transport, and manufacturing costs. That broad pressure is part of why Kashkari moved away from expecting a cut.
What a Rate Hike Would Mean for Borrowers
A rate hike in late 2026 would push borrowing costs higher across the economy. Mortgage rates, already elevated, could climb back toward 8%. Smaller businesses that rely on loans to grow — including firms trying to adopt AI tools — would face a tighter squeeze than large tech companies, which hold enough cash to largely ignore rate changes.
MarketWatch highlighted that Kashkari's data-dependent framing leaves the door open in both directions. If inflation cools faster than expected — or if the Iran conflict eases — he could erase that penciled-in hike just as quickly as he added it. For now, markets are pricing in a Fed that is leaning toward tightening, not easing.
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