U.S. central bankers “have a lot to pay attention to right now,” said Neel Kashkari, president and CEO of the Federal Reserve Bank of Minneapolis, during a fireside chat at the Bloomberg Invest Conference on Tuesday.
A major military intervention in Iran that began on Saturday with U.S. and Israeli airstrikes against military and government targets is ongoing, sending crude oil prices skyrocketing and global stock indexes plummeting on Tuesday morning.
“Is it going to look more like Russia-Ukraine, or is it going to look more like Hamas attacking Israel?” posited Kashkari, seeking to frame the potential scope of the burgeoning war, only the latest economic pressure facing U.S. monetary policy in 2026. President Donald Trump had not indicated as of Tuesday afternoon how long he believes hostilities may last.
Either way, said Kashkari, it’s going to affect U.S. monetary policy. “Right now, it’s just too soon to know what imprint this has on inflation and for how long,” he said.
A widening regional military conflict with Iran injects a degree of geopolitical uncertainty that did not exist last week into a range of persistent domestic unknowns, Kashkari emphasized in Tuesday’s remarks, from stagnating job creation linked to advancements in artificial intelligence to Trump’s on-again, off-again global tariff policies.
And that growing list of risks will likely reshape conversations between policymakers as the next meeting of the Fed’s rate-setting body, the Federal Open Market Committee (FOMC), quickly approaches on March 17 and 18.
Assorted risks to monetary policy
“Generally speaking, we’re around the band of our dual mandate,” said Kashkari on Tuesday, who rotated into a voting role on the FOMC for 2026. He noted that monetary policy was “generally in a pretty good place” ahead of the Fed’s late January decision to leave the federal funds rate in its current range of 3.5% to 3.75%.
His remarks echoed those shared by Fed Chair Jerome Powell after that meeting indicating that upside risks to inflation and downside risks to employment had diminished in the closing months of 2025, supporting the “broad support on the committee” to not cut rates.
But uncertainty around the trajectory of inflation has been amplified by the widening regional military conflict with Iran, Kashkari said, compounding inflationary pressures from sweeping global tariffs that the Supreme Court recently ruled were levied illegally. Trump has vowed and subsequently acted to maintain his tariff regime under alternative authorities that will ultimately require congressional support to sustain.
The Fed’s preferred inflation gauge, the personal consumption expenditures (PCE) price index, printed hotter than forecast in January, but nevertheless likely reflects the one-time price increase that U.S. central bankers have long expected tariffs to pass through. Core PCE, which excludes food and energy prices, came in at 3%, boosted by consecutive months of accelerating services prices and well above the Fed’s stated 2% target.
“Uncertainty is a drag on the economy broadly,” added Kashkari, responding to a question about whether the Supreme Court’s tariff ruling changes his perspective that the current inflation uptick mostly reflects pass-through tariff impacts. “I haven’t seen a lot of evidence that tariffs will go much higher from here.”
Kashkari added that he is watching “how close they can get back to replicating” the illegally imposed tariffs, but that “it isn’t obvious” to him that a similar level of tariffs imposed under a separate authority will delay the Fed’s projected slowdown in tariff-driven inflation.
A broad set of Fed officials will have the opportunity to share their perspectives on how domestic and global developments in the first quarter of 2026 have reshaped expectations for economic output and U.S. monetary policy in 2026 with an updated Summary of Economic Projections set to be released alongside any decision to raise or lower rates.
That forward-looking survey, which Kashkari described as a “very imperfect communication device,” showed a median outlook of just one quarter-point reduction in the federal funds rate for all of 2026 when it was last updated in December.
Kashkari said he supported holding rates steady that month, instead of the committee’s eventual decision to lower its benchmark borrowing rate by 0.25%, and he also supported the January decision to pause. With private-employer and government labor data due for release later this week, he said he “just needs to see” about incoming data before making a call for March, complicated now by the military engagement in Iran.
Neutral rate remains ‘big question’
Ahead of their policy discussions, however, Kashkari made clear in Tuesday’s conversation that the neutral policy rate at which borrowing costs are neither stimulative nor restrictive to economic growth has been a “big question.” The sustained resilience of the U.S. economy signals to him that current policy is not as restrictive as assumed.
Thus, Kashkari said he and his colleagues were “committed for the credibility of the institution” to returning the annual pace of inflation to 2% and affirmed his belief that headline inflation will end 2026 lower than where it began the year. At the same time, he sees evidence in his upper Midwest district that the underlying labor market is not generating a lot of grassroots labor demand, helping to explain the “low hire, low fire” trend.
While he attributed part of the hiring caution to domestic and global economic uncertainty, which has helped companies learn how to get by with what they have, “virtually every” business executive that Kashkari speaks with says they are integrating AI into their business in a meaningful way, “not just some little pilot.”
“I do think that is affecting their decisions about how many people they want to hire,” said Kashkari, a strong departure from two years ago, he noted, when business leaders expressed “a lot of skepticism.” The extent to which the neutral policy rate shifts higher or lower due to productivity gains linked to AI remains unclear.
The buildout of AI is a “massively capital intensive technology,” he said, which has forced the U.S. economy — by nature of how the marketplace operates — to reallocate capital to its most productive use through higher interest rates. Such capital reallocation signals to Kashkari that, in the near term, AI is “probably pushing up” the neutral rate, he said.
With the March FOMC meeting likely being the last that Powell will preside over as Fed chair, Kashkari was asked about the criticisms of Trump’s nominee to replace Powell, former Fed Governor Kevin Warsh, who has said he wants Fed officials to have fewer and more coordinated public engagements and speeches.
“It’s good for democracy because we’re communicating to our constituents,” said Kashkari of his own efforts to explain economic conditions and the Fed’s monetary policy function to consumers and businesses in his district. “I don’t know how you change that if you want to be transparent to the American public.”
