Fed's Rate Cut Debate Intensifies: Kashkari Says 'Close to Neutral' While Miran Calls for 100+ Basis Points

A fundamental disagreement at the heart of the Federal Reserve is coming into sharper focus as policymakers stake out increasingly divergent positions on where interest rates should go in 2026. The debate between hawks who see rates as appropriately positioned and doves who believe further cuts are needed will shape monetary policy in the months ahead—with significant implications for everything from mortgage rates to stock prices.

The divide was laid bare this week through dueling public statements. Minneapolis Fed President Neel Kashkari said Monday that rates may already be "pretty close to neutral"—the theoretical level that neither stimulates nor restricts economic activity. Just one day later, Fed Governor Stephen Miran argued that policy is "clearly restrictive" and the central bank will need to cut rates by more than a full percentage point this year.

The Hawkish Case: Kashkari's View

Kashkari, who gained a vote on the Federal Open Market Committee (FOMC) in 2026, has emerged as one of the more hawkish voices at the Fed. His argument rests on the economy's remarkable resilience despite multiple rate increases.

"My guess is we're pretty close to neutral right now. Over the last couple of years, we kept thinking the economy is going to slow down, and the economy has proven to be far more resilient than I had expected. That tells me monetary policy must not be putting that much downward pressure on the economy."

— Neel Kashkari, Minneapolis Fed President, speaking on CNBC

Kashkari's logic is straightforward: if rates were truly restrictive, we would expect to see more pronounced economic weakness. Instead, the labor market remains solid, consumer spending is strong, and GDP growth continues to exceed expectations. Either neutral is higher than previously thought, or the economy has structural characteristics that make it more resistant to interest rate changes.

The Minneapolis Fed president has also expressed concern that premature rate cuts could reignite inflation, which remains above the Fed's 2% target. With tariff threats adding uncertainty to the price outlook, Kashkari believes the prudent approach is to hold steady and let the data guide future decisions.

The Dovish Case: Miran's Argument

Governor Miran sees the same economy and reaches very different conclusions. He believes current rates are actively holding back growth and that the Fed risks unnecessarily weakening the labor market by maintaining its current stance.

"I think policy is clearly restrictive and holding the economy back. I believe we will need to cut rates by well over 100 basis points this year. The labor market, while still healthy on the surface, shows signs of cooling that warrant attention."

— Stephen Miran, Federal Reserve Governor, on Fox Business Network

Miran's case draws on leading indicators that suggest the economy may be softer than headline numbers indicate. The quits rate has fallen to its lowest level since 2014, suggesting workers feel less confident about finding new jobs. Temporary employment, often a harbinger of broader hiring trends, has declined. And the housing market remains substantially depressed by mortgage rates near 6%.

The Governor also argues that inflation is on a clear downward trajectory and that the Fed can afford to be proactive rather than reactive. Waiting until the economy weakens substantially would require larger, more disruptive rate cuts later.

What the Disagreement Means

The gap between Kashkari and Miran represents one of the widest policy divergences among Fed officials in years. It reflects genuine uncertainty about fundamental economic questions that defy easy answers.

Key questions at the heart of the debate:

• Where is neutral? Estimates range from 2.5% to 4%, a massive spread that implies vastly different policy paths
• How much does policy lag? Rate changes can take 12-18 months to fully impact the economy
• Is inflation defeated? Core measures remain above target despite improvement
• How strong is the labor market really? Headline numbers look solid but some leading indicators are weakening

The Fed's December projection showed policymakers expecting just two rate cuts in 2026, down from their previous forecast of four. That median forecast masked substantial variation among individual participants, with some seeing more aggressive cuts and others anticipating none at all.

Market Implications

For investors, the internal Fed debate creates uncertainty but also opportunity. Markets currently expect roughly two quarter-point cuts in 2026, broadly consistent with the December projections. If Kashkari's view prevails and the Fed holds steady, rate-sensitive assets could face headwinds while banks and other beneficiaries of higher rates might outperform.

Conversely, if Miran's perspective gains traction and the Fed cuts more aggressively, growth stocks, bonds, and interest-rate-sensitive sectors like housing and utilities could rally. The dollar would likely weaken, potentially boosting commodities and international investments.

The next FOMC meeting on January 27-28 is almost universally expected to result in no change to rates. The policy statement and Chair Powell's press conference will be scrutinized for any hints about how the internal debate is trending and what conditions would prompt action in either direction.

The Powell Factor

Fed Chair Jerome Powell has navigated between the hawks and doves throughout his tenure, seeking consensus while maintaining flexibility. His term expires in May, and President Trump is expected to announce a nominee in the coming weeks—a decision that could significantly influence the trajectory of monetary policy.

Powell's recent communications have emphasized data dependence and patience, declining to lock in a specific path for rates. This approach has frustrated some observers who want clearer forward guidance but has allowed the Fed to respond to an unusually uncertain economic and geopolitical environment.

The five-candidate shortlist for Powell's replacement reportedly includes individuals with varied policy preferences, though all would likely prioritize inflation control while remaining attentive to labor market conditions. The appointment could tilt the balance of the rate debate in meaningful ways.

What to Watch

Several data points and events will influence how the debate evolves:

• Friday's jobs report: December employment data could shift perceptions of labor market health
• January FOMC meeting: Policy statement language and press conference will signal Fed thinking
• Inflation data: Any re-acceleration would strengthen the hawkish case
• Tariff developments: Implementation could push prices higher, complicating the outlook
• Fed Chair nomination: Trump's pick could reshape policy priorities

For now, the debate remains unresolved, and both Kashkari and Miran may ultimately prove partially correct. The economy is strong enough to tolerate current rates, as the hawks argue, but may eventually need support, as the doves contend. The question is timing—and on that, reasonable people at the Fed continue to disagree.