Neel Kashkari, President of the Federal Reserve Bank of Minneapolis, spoke at a St. Paul Area Chamber event in St. Paul, Minneapolis, on Wednesday. He said the main issue is how long the Strait of Hormuz will be closed and how that could affect inflation.
He said inflation is too high and that the Federal Reserve needs to return it to 2%. He said the Fed should not change that 2% target.
He said inflation shocks do not remove the Fed’s responsibility, but they make the task harder. He said that before the Iran conflict he had some confidence inflation was moving back towards 2%.
He said the Iran-related shock has changed the inflation outlook. He also said the labour market is moving sideways and described it as “lukewarm”.
He said the labour market appears to be holding up. He also said he is not sure whether Fed policy rate decisions will have much effect on mortgage rates.
Looking back at commentary from last year, we can see the main concern was how a major geopolitical shock like the Strait of Hormuz closure would fuel inflation. That event did indeed upend the environment, and its effects are still shaping our current market reality. The fundamental problem identified then—inflation being too high—remains the central challenge for the Federal Reserve today.
The shock from the Iran conflict in 2025 sent WTI crude oil prices briefly above $120 a barrel, and while they have since settled around $95, the geopolitical risk premium is now firmly embedded. Any new tension in the Middle East could easily cause another spike, making long-dated call options on crude oil a prudent hedge against volatility. This strategy anticipates that the supply-side risks that emerged last year have not disappeared.
As a result, inflation has proven incredibly sticky, with the latest CPI report for April 2026 showing a year-over-year increase of 3.4%, well above the Fed’s goal. This confirms the fears from 2025 that external shocks would make the job of getting back to 2% much more difficult. Therefore, we should not expect the Fed to signal any policy easing in the near future.
For interest rate traders, this means positioning for a “higher for longer” scenario is still the most logical approach. The market may be pricing in cuts for late this year, but the stubborn inflation data suggests those expectations could be pushed out even further. We see value in options strategies on SOFR futures that would profit if the Fed is forced to hold rates steady through the end of the year.
The labor market picture from last year, described as “lukewarm” and “hanging in there,” has held remarkably true. The most recent jobs report showed a solid gain of 210,000 jobs with unemployment at a low 3.8%, giving the Fed no reason to cut rates to support employment. This persistent strength in the labor market provides the Fed with the justification it needs to focus exclusively on fighting inflation.
