Federal Reserve Bank of Minneapolis President Neel Kashkari is emerging as a top proponent of higher interest rates.
Kashkari, one of three dissenters at the Federal Open Market Committee's most recent meeting, said the current monetary setting may not be restraining the economy enough.
"Now is the time to start slowly moving up as we get more data in," Kashkari said in a CNBC interview, arguing that an earlier, measured response would reduce the risk of much steeper increases should inflation become embedded.
Labor Market Data Weighs In
Yet, his thesis faces a test after the US nonfarm payrolls unexpectedly fell by 23,000, widely missing the consensus estimate for an increase of 85,000, while average hourly earnings rose just 0.1% in the month, below the 0.3% forecast. The unemployment rate, however, declined to 4.1% from 4.2%.
Markets responded and flipped to favor the no-hike. The FedWatch tool, which had a 55.7% versus 45.3% split in favor of a hike, now shows 57.9% against 42.1% in favor of the interest rate remaining unchanged.
The case for a rate pause already had support among economists who see financial markets and interest-sensitive sectors already applying the brakes. Yet, a mixed report gives ammunition to both sides of this increasingly consequential policy debate.
Is Policy Already Restrictive?
State Street's chief economist Simona Mocuta says the housing market sends a warning. She noted how housing starts dropped in May to their lowest level in five years, affordability is historically stretched, and rental vacancies have risen to their highest since 2017.
"Housing sector's message to the Fed: we need a cut, not a hike!" Mocuta wrote. She expects shelter-rent inflation to slow to 3.2% this year from 3.7% in 2025, providing a continuing offset to price pressure from tariffs and energy. Higher long-term Treasury yields and mortgage rates have also tightened financial conditions without an additional move in the policy rate.
In a Bloomberg interview, Harvard professor and former Obama economic adviser Jason Furman made a similar remark.
"Rates may be set above neutral already," he said, adding that policymakers could already have "a little bit of a foot on the brake pedal."
That restraint matters because the latest inflation pickup may not be a classic demand-driven problem. Furman estimated that tariffs may have added half a percentage point to one percentage point to inflation, while the Iran conflict has added further pressure through energy prices.
Such shocks raise the price level, he said, but should not permanently lift inflation if the Fed's credibility holds.
The crucial test is whether those pressures bleed into economy-wide wage and price setting. Furman said he is "cautiously optimistic" because wage gains have not accelerated in a manner consistent with a price-wage spiral.
Mocuta likewise noted that wage inflation has continued to moderate even with unemployment at 4.2% (now 4.1%), suggesting the labor market is not overheating.