Fed's Kashkari says 'now is the time to start slowly moving' rates up

Kashkari shifted from supporting the decision to hold rates steady to advocating that the Fed begin raising rates in small increments. He said the time has come to begin raising rates in small steps as more data arrive. This change reflects his view that current policy is not sufficiently restrictive to bring inflation down.

Adopting a gradual approach carries the risk that inflation may remain elevated if the increases are too modest to counteract ongoing supply pressures. Kashkari warned that waiting too long could force the Fed to implement larger, more disruptive hikes later. The cost of delay is therefore a potential need for more aggressive tightening down the line.

The gradual strategy may stop working if inflation persists despite small rate rises, particularly if supply shocks continue to press on consumers. In such a scenario, the Fed would need to abandon the slow pace and consider sharper increases to regain control. Kashkari expressed uncertainty about the committee’s September 15-16 meeting, noting that incoming data will determine the path forward.

Market pricing already leans toward a possible rate hike in the near term, with a stronger chance later in the year, reflecting traders’ expectations of the Fed’s eventual move. Meanwhile, other officials like Philadelphia Fed President Anna Paulson see the current level as mildly restrictive and favor holding steady. This divergence underscores the uncertainty surrounding how quickly and how far rates should rise.