Minneapolis Fed President Neel Kashkari said the escalating conflict in the Middle East has significantly clouded the policy outlook, undermining earlier confidence that easing inflation would pave the way for rate cuts. Kashkari noted that he had entered 2026 expecting that cooling price pressures might justify a single reduction in interest rates.
However, the joint U.S.-Israel attack on Iran has introduced a potential new global shock. Policymakers and markets alike must now determine how severe the disruption might become and whether it will resemble a prolonged geopolitical conflict like Russia’s invasion of Ukraine or a more contained escalation.
Kashkari stressed that the key risk lies in inflation expectations. If headline inflation remains elevated for an extended period following years of already strong price growth, the Fed may need to remain cautious. In such a scenario, policymakers would have to carefully assess the persistence of inflation before moving toward any easing of monetary policy.
