By Michael S. Derby
NEW YORK, Oct 1 (Reuters) - Minneapolis Federal Reserve President Neel Kashkari said on Thursday that he expects additional rate increases will be needed to restrain the economy going into 2027, though he is unsure about whether the next move should happen later this month.
"I'm open-minded" about how the Fed proceeds with rate increases and "I don't have a strong view" as to whether the next hike should happen at the October 27-28 meeting, Kashkari told Reuters in an interview.
The Fed will hold its last meeting of the year on December 8-9.
Kashkari, who was among the 12 Fed policymakers who voted to raise the central bank's benchmark rate to the 3.75%-4.00% range last month, said his projections submitted for that meeting called for one more quarter-percentage-point hike this year and another such move in 2027.
And while he declined to characterize the risks around his interest rate outlook, he noted that his forecasts have already been challenged. Since the September meeting, "the data that I've gotten suggests the economy is doing even better than I anticipated" in an environment where "inflation is still too elevated," Kashkari said.
"If the economy proves to just be incredibly resilient and inflation therefore is probably stickier than I appreciate, then policy could need to go higher yet than I'm anticipating at this moment. But I don't know" if that is how things will play out, the Minneapolis Fed chief said.
INFLATION CONTROL
The Fed raised rates last month to curb high inflation that has overshot the central bank's 2% target for more than half a decade. Kashkari dissented in favor of a rate increase at the policy meeting in July.
Policymakers at last month's meeting also penciled in one more increase in 2026. Financial markets had been expecting the Fed's monetary tightening to be even more aggressive until New York Fed President John Williams said on Tuesday that, while he sees another rate hike as likely this year, "there is no need for urgency." Investors dramatically reduced the odds of a hike this month after Williams' remarks.
Although Kashkari noted that the recent Fed rate hike contributed to a sharp rise in long-term borrowing costs, he said monetary policy is not doing much to restrain the economy.
"The labor market looks quite healthy right now. It seems like the economy is doing quite well. And when I look at that constellation, that says, boy, policy is probably not particularly restrictive right now," he said.
Kashkari also said that markets are functioning properly despite the current volatility.
"I'm not seeing any evidence of systemic risk" in markets, he said. "I do think the banking sector bears watching closely, and we are (watching)" given the rapid shift in borrowing costs.
Kashkari said the Treasury market appeared to be functioning fine and has been able to process repricing.
He added that he believed monetary policy under new Fed Chairman Kevin Warsh was having an impact on markets.
"If you look at long rates moving as much as they've moved over the last several weeks, part of that is real economic developments," Kashkari said. But he added, "I think part of that is hey, the Fed is really serious, the Warsh Fed, it's not talk, the Warsh Fed is really serious about controlling inflation."
"I've got some confidence that inflation's heading back down over the next couple of years to our 2% target, but shocks keep surprising us," he said.
(Reporting by Michael S. Derby; Editing by Paul Simao)
