Kashkari Breaks From Markets, Insists Fed Still Needs One More Hike in 2026

Since Wednesday morning's release of the August PCE report, which showed headline inflation at 3.4% and core inflation at 3.0%, both below forecasts, the Fed's own officials can't agree on what it means.

Minneapolis Fed President Neel Kashkari told CNBC's Steve Liesman in an interview at a Council on Foreign Relations event that the data "didn't really change the story" for him. "Inflation is still too high," Kashkari said. "It's been elevated now for more than five years."

According to FXStreet, Kashkari went further, saying he has penciled in one more rate increase for 2026 and still expects the Fed to deliver on that plan. He called the labor market "pretty good," pointing to ADP's report Wednesday that private payrolls grew more than economists expected in September.

Markets Are Betting the Other Way

Traders aren't buying Kashkari's hawkish read. According to CNBC, odds of another Fed hike fell to roughly 35% after the PCE data. Crypto Briefing put the drop at odds falling from above 70% to around 37%, citing the same report alongside comments from New York Fed President John Williams on September 29 that there's "no need for urgency" on further rate moves.

That repricing sent Bitcoin briefly above $85,598, according to Crypto Briefing, which also noted Bitcoin closed September with a 7% monthly gain, its first positive September following a positive August since 2013. Grayscale's Zach Pandl described the Fed's earlier hike this month as a "mid-cycle adjustment" rather than the start of sustained tightening, a framing that assumes continued capital flowing into risk assets like crypto.

Stocks told a different story. According to 1st Headlines, the S&P 500 fell Wednesday even with the softer inflation print, and the index posted a loss for the month of September overall. Bond and crypto traders priced in a dovish Fed, while equities sold off anyway, suggesting investors are weighing something beyond the inflation number, possibly the AI investment concerns Kashkari himself raised.

The Neutral Rate and the AI Warning

Kashkari also used the CFR appearance to flag a bigger worry: the trillions pouring into AI infrastructure might not pay off. "If this ends up being massive investment that is not nearly as productivity enhancing as we assume, then this will have been malinvestment, and then there could be big economic consequences for the economy writ large," he said, according to CNBC.

He said demand for investment capital tied to the AI buildout has pushed his estimate of the neutral funds rate up to 3.25%, a level he called likely elevated "temporarily." FXStreet reported Kashkari also said the longer the economy stays strong, the more he questions whether current policy is even tight. That's an unusual admission from a Fed official actively defending the need for more hikes.

If core inflation keeps printing below forecast and the labor market shows no fresh overheating, pushing for another hike risks tightening into a slowdown that hasn't shown up in hard data yet, which is essentially Williams' and the market's bet. Kashkari's counter is that five years of inflation running above target is its own kind of damage, regardless of whether the next print looks good.

According to Newsquawk, Chicago Fed President Austan Goolsbee, a 2027 voter, separately flagged a widening gap between consumer sentiment and actual hard spending data. This observation adds complexity to any simple story that households are either fine or struggling.

A Side Note on the Renovation Fight

Separately, FXStreet reported Kashkari said he wasn't "shocked" that the Federal Reserve's inspector general found no wrongdoing in the central bank's headquarters renovation project, a project President Trump had criticized as "ostentatious." The IG's finding, confirmed by 1st Headlines, closes out a dispute that had become a political flashpoint earlier this year.

The sources don't establish a date for the Fed's next policy meeting, so it remains an open question whether Kashkari's one-more-hike view carries the committee, or whether the market's 35%-37% odds prove closer to the mark. The next inflation reading will be the test Newsquawk flagged, since a "confirmed narrative needs a genuine surprise to break it."