Fed's Kashkari: 'We're Pretty Close to Neutral' — Rate Cuts May Be Ending

The Fed is signaling the rate-cutting party may be over.

Minneapolis Federal Reserve President Neel Kashkari said Monday that the central bank is "pretty close to neutral" on interest rates—suggesting the aggressive cutting cycle that began in September 2024 is nearing its end.

"My guess is we're pretty close to neutral right now," Kashkari told CNBC. The key question now: whether to focus more on a softening labor market or stubbornly persistent inflation.

Where Rates Stand

The Fed has cut rates by 175 basis points since September 2024, bringing the target range to 3.50%-3.75%. That's aggressive easing by historical standards—but still well above the near-zero rates that defined the post-2008 era.

Most FOMC members expect at least one more cut in 2026. The CME FedWatch tool points to two cuts—one in April, one in September. But Kashkari's comments suggest even that modest path may be optimistic.

Moody's chief economist Mark Zandi offers a contrarian view, predicting three cuts before midyear. But Zandi is in the minority. Most Fed watchers see the cutting cycle winding down.

The Neutral Rate Debate

"Neutral" is Fed-speak for the interest rate that neither stimulates nor restricts economic growth. It's theoretical—no one knows exactly where it sits—but current estimates cluster around 3%.

Kashkari's statement that the Fed is "pretty close" implies he sees neutral somewhere in the 3.25%-3.50% range. That leaves room for maybe one more cut, not several.

The implication for markets: don't expect rates to return to pandemic-era lows. The Fed is managing expectations toward a "higher for longer" baseline that some investors haven't fully priced.

Labor vs. Inflation

Kashkari framed the Fed's dilemma as a choice between two risks:

Labor market softening: Unemployment has drifted up to 4.6%, and recent job reports show cooling momentum. Cutting rates supports employment but risks reigniting inflation.

Sticky inflation: The Fed's preferred core PCE measure remains at 2.8%—above the 2% target. Holding rates steady fights inflation but risks overtightening into a slowdown.

This is the classic Fed balancing act, but the current economic data makes it unusually tricky. Growth remains solid, inflation is declining but not dead, and employment is softening but not collapsing.

Powell's Clock Is Ticking

The rate debate unfolds against a significant backdrop: Jerome Powell's term as Fed Chair expires May 15, 2026.

President Trump will nominate a successor—and that transition could reshape monetary policy. Powell has been a consensus-builder who navigated the pandemic response and subsequent inflation fight. A new chair might take a different approach.

The most likely path: the Fed pauses early in the year, then reassesses once a new Chair is confirmed. That suggests limited action before summer regardless of economic conditions.

What Markets Are Pricing

Bond markets have adjusted expectations significantly. The 10-year Treasury yield sits at 4.18%, reflecting expectations for rates to remain elevated.

The housing market has already felt the impact. Mortgage rates remain above 6.5%, keeping first-time buyers sidelined despite lower Fed policy rates.

Stock markets have largely shrugged off higher-for-longer concerns, but that's partly because the economy has proven resilient. If growth slows while rates stay elevated, the equity calculus changes.

Divisions Remain

Not all Fed officials agree with Kashkari. The 2025 divisions that shaped policy are expected to persist.

Some governors want to cut more aggressively to support employment. Others worry about declaring victory on inflation too early. The next chair will inherit a committee that lacks consensus on the path forward.

For now, Kashkari's comments represent the hawkish end of Fed thinking. Markets should expect speeches from other officials to provide counterpoint in coming weeks.

Trading the Fed

For equity investors, Kashkari's comments have mixed implications:

Growth stocks: Higher rates for longer typically pressure growth multiples. The AI trade may face headwinds if the Fed stays restrictive.

Value stocks: Banks and other rate-sensitive sectors benefit from the steeper yield curve higher rates create.

Bonds: With cuts potentially ending, the bond market rally of late 2025 may be over. Duration exposure carries risk if inflation surprises to the upside.

The Bottom Line

The Fed's rate-cutting cycle is maturing. Kashkari's "close to neutral" comment signals that the dramatic easing of 2024-2025 is giving way to a more cautious approach.

For investors who built portfolios expecting rates to return to pre-pandemic levels, it's time to recalibrate. The "higher for longer" narrative has shifted from forecast to reality.

The next major catalyst: January's inflation data and the Fed's response in its first 2026 meeting. After that, attention shifts to Powell's successor and whatever policy changes a new chair brings.