Fed's Kashkari lifts his neutral-rate estimate to 3.25%, leaving policy only about half a point above it

Minneapolis Federal Reserve President Neel Kashkari said on Wednesday that "inflation is still too high," hours after the August PCE report came in cooler than economists expected. Speaking to CNBC's Steve Liesman at a Council on Foreign Relations event in New York, he said core inflation is running around 3% and "I didn't think the inflation data today really changed that story for me very much," CNBC reported.

The quote made the headlines. The more useful detail was further down: Kashkari said the economy's resilience through repeated shocks has led him to raise his estimate of the neutral federal funds rate, the level that neither speeds up nor slows the economy, to 3.25%. He said that level is probably elevated for now because the AI buildout is soaking up investment capital.

The number behind the number: how tight is policy, really?

The Fed raised its target range by a quarter point on September 16, to 3.75% to 4%, on a 12-0 vote, according to the FOMC statement. Set that against Kashkari's new neutral estimate and the gap is narrow:

Two things follow from the Fed's own September projections. First, Kashkari is not an outlier: the committee's median longer-run rate rose to 3.2% from 3.1% in June, so his 3.25% sits right on the consensus. Second, if neutral is that high, the September hike only moved policy from mildly restrictive to modestly restrictive. The committee's median path already has the funds rate at 4.1% at year-end, which implies one more quarter-point increase, and a higher neutral makes that easier to justify, not harder.

The obvious read of Wednesday's softer PCE number was relief for borrowers. Kashkari's comments point the other way: one cooler month does not change a view built on five years of above-target inflation, and a higher neutral rate lowers the bar for keeping rates where they are or higher. He did not say how he would vote at the October 27-28 meeting.

Who it hits: anyone on a floating rate

The bank prime rate, which most business lines of credit and home equity lines are priced from, stood at 7.00% in the Fed's FRED series as of September 28. Some illustrative arithmetic: a contractor with $250,000 drawn on a line at prime plus 2 points pays about $22,500 a year in interest. One more quarter-point Fed move, the path the median projection already implies, would add about $625 a year to that bill. It is the long end that bites harder: the 10-year Treasury yield closed Wednesday at 5.29%, according to the Treasury's daily curve, and fixed-rate equipment loans and mortgages price off that, not off the Fed's range. Our story on the 10-year covers why it has risen so far.

The AI warning

Kashkari also questioned whether the AI investment wave will pay off. "The fruits have not yet borne out," he said, adding that if the spending proves "not nearly as productivity enhancing as we assume, then this will have been malinvestment," with "big economic consequences." He acknowledged that rate hikes may not slow the biggest cloud spenders "much," but said higher borrowing costs can still cool other parts of the economy. That is the uncomfortable part for Main Street: the sector driving demand for capital is the one least sensitive to its price, and the smaller borrowers are the ones who feel it.

Governor Lisa Cook made a similar inflation point earlier Wednesday; see our story on her speech. The next data test is Friday's September jobs report.

Sources: CNBC; Federal Reserve Board (FOMC statement and Summary of Economic Projections, September 16, 2026); Federal Reserve Bank of St. Louis FRED; U.S. Department of the Treasury. Loan figures are illustrative arithmetic. This is market information, not investment advice.