Federal Reserve Bank of Minneapolis President Neel Kashkari delivered a sobering assessment of monetary policy Monday morning, suggesting that the central bank is approaching the end of its rate-cutting cycle while warning of potential labor market weakness ahead.

"My guess is we're pretty close to neutral right now," Kashkari said in a live CNBC "Squawk Box" interview, referring to the level where interest rates neither stimulate nor restrict economic growth. "We just need to get more data to see which is the bigger force."

The comments carry particular weight in 2026, as Kashkari is now a voting member of the Federal Open Market Committee. His views will directly influence monetary policy decisions at a time when the Fed faces competing pressures from sticky inflation and a cooling labor market.

The Neutral Rate Question

The federal funds rate currently sits in a target range of 3.5% to 3.75%, down from peaks above 5% but still elevated by historical standards. According to projections from the December FOMC meeting, this level is only about half a percentage point from what most policymakers consider the "neutral" rate.

Kashkari's assessment suggests limited room for further rate cuts without risking a resurgence of inflation. For investors who had anticipated a more aggressive easing cycle, the message is clear: don't expect dramatic relief from high borrowing costs anytime soon.

"I think inflation is still too high," Kashkari stated plainly. "And the big question in my mind is, how tight is monetary policy?"

That question—how much the current rate level is actually restraining economic activity—has divided Fed officials for months. Some argue that rates remain restrictive and further cuts are warranted. Kashkari appears to be in the camp that believes the economy has largely adjusted to current rates.

The Unemployment Warning

Perhaps more striking than Kashkari's views on rates was his assessment of labor market risks. The unemployment rate has drifted higher to 4.6% over the past year, a four-year high, while monthly job creation has slowed dramatically.

"Inflation risk is one of persistence, that these tariff effects take multiple years to work their way all the way through the system," Kashkari explained. "Whereas I do think there's a risk that the unemployment rate could pop from here."

The phrase "could pop" suggests Kashkari sees the potential for an abrupt deterioration in employment conditions rather than the gradual cooling that has characterized the market thus far. Such a scenario would force difficult choices at the Fed, potentially requiring rate cuts even if inflation remains above target.

A Labor Market That's 'Clearly Cooling'

Kashkari described the job market as "clearly cooling," a characterization supported by recent data:

  • Monthly payroll growth: Averaged roughly 50,000 jobs in 2025, the weakest pace since the financial crisis
  • Unemployment rate: Rose from 3.7% at the start of 2025 to 4.6% currently
  • Wage growth: Has moderated to approximately 3.5% year-over-year
  • Job openings: Have declined significantly from pandemic-era peaks

Yet the labor market hasn't collapsed. Initial jobless claims recently fell to 199,000, suggesting employers aren't rushing to lay off workers. The economy appears suspended between strength and weakness—a state that complicates Fed decision-making.

Tariffs Add Uncertainty

Kashkari acknowledged that trade policy creates additional complexity for monetary policy. With average U.S. tariff rates at their highest level in 80 years, import costs are elevated across the economy.

The challenge for the Fed is distinguishing between tariff-driven price increases—which might be one-time adjustments—and genuine inflation that requires a monetary policy response. Kashkari suggested that tariff effects could persist "multiple years," potentially keeping goods prices elevated longer than markets expect.

Support for Chair Powell

On the question of Fed leadership, Kashkari offered a diplomatic but clear statement of support for Jerome Powell, whose term as chair expires in May.

"I would be happy if Jerome Powell stays on board after his term as chair ends," Kashkari said. Though Powell is certain to be replaced as chair by President Trump's nominee, his term as governor extends until January 2028, raising the possibility he could remain on the FOMC in a reduced role.

Market Implications

Kashkari's comments reinforce the "higher for longer" narrative that has kept Treasury yields elevated and created headwinds for rate-sensitive assets. Key takeaways for investors include:

  • Rate cuts may be limited: If rates are near neutral, the Fed has less room to ease without risking inflation
  • Employment data matters more: With inflation concerns balanced against labor market risks, the monthly jobs report takes on heightened importance
  • Tariff uncertainty persists: Trade policy will continue to cloud the inflation picture for an extended period
  • Downside risks are real: The warning about unemployment "popping" suggests Fed officials are attuned to recession risks

Looking Ahead to the January Meeting

The Federal Open Market Committee meets January 27-28, and markets overwhelmingly expect rates to remain unchanged. Kashkari's comments suggest he will be among those supporting a pause.

The bigger question is what comes next. If Kashkari is right that rates are near neutral, the bar for further cuts may be higher than markets anticipate. Conversely, if unemployment does "pop" as he warned, the Fed could face pressure to ease more aggressively than current projections suggest.

The Bottom Line

Neel Kashkari's Monday interview painted a picture of a Federal Reserve navigating treacherous terrain. Interest rates appear close to equilibrium, but the path forward is uncertain. Inflation remains too high, tariffs complicate the outlook, and the labor market could weaken abruptly. For investors, the message is to prepare for continued volatility as the Fed walks its tightrope through 2026.