Fed's Kashkari sees 60% chance of soft landing after one more interest rate hike, holding

Minneapolis Fed President Neel Kashkari pins the odds of the Federal Reserve being able to engineer a "soft landing" at 60% in a new blog post out Tuesday.

His odds are prefaced on the central bank doing one more rate hike and holding at those levels for an extended time while seeing inflation gradually come back down to the Fed’s 2% target.

"Given the resilient economic activity we have observed, this looks increasingly like the proverbial soft landing that we are hoping to achieve," Kashkari wrote. "Because of the actual progress we have made against inflation and the actual labor market performance, today I put a 60% probability on this outcome."

The alternative is the Fed ends up having to raise rates higher.

Kashkari said he would have more confidence in a soft-landing scenario if he were more certain that policy was higher now than the neutral rate – or the estimate level of interest rate that neither boosts nor pushes down economic growth.

Kashkari wrote that if his estimate of the neutral rate was zero pre-pandemic, then the Fed has accomplished raising rates high enough similar to what happened in 1994, when the Federal Reserve raised rates seven times, from 3% to 6% and the economy continued to grow.

But he noted that underlying inflationary dynamics are different today than in 1994, so simply repeating the 1994 tightening might not be enough.

Kashkari sees raising rates one more time this year, in line with the median Fed projection released last week; though he sees holding rates at a slightly higher level next year than his colleagues.

The Fed has raised rates 11 times since March 2022 in the most aggressive rate-hiking campaign since the 1980s. While inflation has dropped, it remains around 4% — double the Fed’s inflation target.

Read more: What the Fed rate-hike pause means for bank accounts, CDs, loans, and credit cards