Kashkari: Fed may need to raise rates if Strait of Hormuz stays closed

The Federal Reserve may have to raise interest rates multiple times if the U.S.-Israeli war against Iran drags on, Federal Reserve Bank of Minneapolis President Neel Kashkari said.

Both inflation and unemployment could rise if the Strait of Hormuz stays closed, Kashkari wrote Friday, May 1, in an essay explaining his objection to language at this week’s Federal Open Market Committee meeting suggesting likely future rate cuts.

Raising rates would risk pushing unemployment higher.

But Kashkari said: “I firmly believe that anchored long-run inflation expectations are necessary for achieving maximum employment and a vibrant economy.”

The Fed uses interest rates to balance its “dual mandate” of low unemployment and stable prices, deploying rate hikes to tame high inflation and rate cuts to lower unemployment.

The central bank raised rates to a 22-year high as inflation soared coming out of the COVID-19 pandemic, then began to cut as price increases came down. The most recent cut, in December 2025, brought the target range for the federal funds rate to between 3.5% and 3.75%.

President Donald Trump has repeatedly pressured the Fed to lower its benchmark rates, which influence consumer and business borrowing costs such as credit card and mortgage rates.

Still, the 12-member Federal Open Market Committee opted on April 29 to leave rates unchanged. Kashkari was one of three regional bank presidents who wanted the Fed to also move away from “easing bias,” or signaling publicly it’s leaning toward a future rate cut.

Before the Iran war began, Kashkari wrote, “I felt fairly confident that core inflation was headed back to our 2% target,” and “the labor market appeared lukewarm but largely stable.”

The war, which began at the end of February, changed those expectations.

Even if the Strait of Hormuz reopens soon, Kashkari wrote, forecasters are placing core Personal Consumption Expenditures (PCE) inflation at 3% this year. Core inflation excludes volatile fuel and food prices.

“If they are right, core inflation will have been at roughly 3% for three years in a row,” he wrote. “Such a meaningful inflation shock could put downward pressure on spending in the U.S. as consumers are forced to cut back on less essential purchasing, potentially pressuring the U.S. labor market.”

Because it’s unclear what direction the war will take — and how it will impact the economy — the Fed should signal that it could either raise or lower interest rates, Kashkari wrote.

“This could tighten financial conditions somewhat today,” he wrote, “pushing back against a high-inflation scenario that could require an even stronger monetary policy response in the future.”

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