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Kashkari believes the U.S. economy and job market remain strong. He says current interest rates are not restrictive enough, and inflation is still far from the 2% target; therefore, the Fed should begin rate hikes as soon as possible in a gradual manner rather than waiting until inflation has become entrenched and then being forced to tighten aggressively. He emphasized support for gradual rate hikes but did not commit to taking action as early as September. When asked whether the Fed would raise rates three times this year, Kashkari responded that it is not impossible. Differences within the Fed regarding the rate path are beginning to come into view.

On Wednesday, the Minneapolis Fed president Kashkari publicly stated that now is the time to start slow rate hikes to curb inflation and avoid being forced to tighten sharply later. According to CNBC, Kashkari, who has a voting role on the Fed’s monetary policy committee (FOMC) this year, said in an on-site interview that he leans toward beginning gradual rate hikes as early as September, but he made no clear commitment on a timetable. He stressed that he does not advocate large rate hikes; instead, he wants to act sooner by moving forward in small steps.

This statement sharply contrasts with the position of most FOMC voters last week, and it has made market expectations for policy direction in September and October even more complicated.

Kashkari is one of three dissenting members at last week’s FOMC meeting, along with him. The three regional Fed presidents at the time—including Kashkari—each argued for a 25-basis-point hike, while the other nine members voted to keep the policy rate unchanged. This was the first time since Fed Chair Waller took office in May that the FOMC meeting saw a dissenting vote.

On Wednesday, Kashkari said he is not yet sure what policy action the Fed should take at its next FOMC meeting in September, adding that he wants to observe how subsequent economic data unfold. Asked whether the Fed could raise rates three times before year-end, he replied, “That is not impossible.”

“If inflation continues to level off, or even worsens further, then I think we will have to start gradually adjusting interest rates in order to bring inflation down,” he added.

Economic resilience leads Kashkari to question the basis for the current policy being restrictive enough to warrant hikes. He noted that corporate profits are strong, and both consumers and the labor market remain solid. Against that backdrop, he sees no evidence that monetary policy currently has a clearly restrictive effect.

“Corporate earnings are very impressive, consumers can hold up, and the labor market can hold up. Looking at these developments, I can’t help but ask: what evidence is there that monetary policy is now especially restrictive?” he said. He also said the U.S. economy faces a series of supply shocks that continue to weigh on consumers, and inflation is still some distance away from the Fed’s 2% goal. In his view, rather than waiting until inflation is deeply entrenched and then being forced to hike aggressively, the better approach is to respond earlier with small steps.

Internal divisions in the committee are clear. On the day before Kashkari made the remarks above, Anna Paulson, president of the Philadelphia Fed and another FOMC voter this year, expressed a markedly different view. According to CNBC, Paulson believes that existing evidence shows that the current level of interest rates has already created “moderate restriction” on economic conditions, and she supports keeping rates unchanged while continuing to assess incoming data. She also said that voting to keep rates unchanged at last week’s meeting was “not a difficult decision” for her.

The public disagreement between the two officials reflects the Fed’s internal tension regarding inflation prospects and the pace of policy.

Kashkari said he is still not sure what decision the committee will make at the meeting scheduled for September 15 to 16, and he believes the data at that time will be key. The market currently prices in a slight tilt toward a September hike, while the probability of an October hike is higher.

With no pressure applied, communication strategy still needs clarification

Although Powell previously expressed a preference for lower rates, Kashkari said this Fed chair did not put any pressure on him.

“He told me, ‘Do what you think is right for the economy.’ I said, ‘I really appreciate that,’” Kashkari recounted.

The three dissenting votes were the first instances of opposition during Waller’s tenure, drawing significant attention from the public. Kashkari also pointed out that the FOMC ultimately must decide on an appropriate communication strategy, but he did not disclose specific details. This suggests that internal discussion at the Fed is still ongoing about how to convey policy signals to the market.