The Fed's Neel Kashkari is now penciling in an interest rate hike this year

"In March, I had penciled in one rate cut by the end of the year. In June, I've changed that to one rate hike by the end of the year," Kashkari said during a panel discussion at the Aspen Ideas Festival, according to CNBC. "It's a pencil, and so we're going to have to see how the data comes in."

Broader inflationary forces across the economy — not just the oil price volatility stemming from Middle East fighting — are driving Kashkari's updated thinking, he explained. "I'm concerned about inflation, and it's not only tied to what's happening in the Middle East, it's just the impression of broader inflationary pressures in the economy," he told Bloomberg in a separate interview on the sidelines of the festival.

Among the forces Kashkari identified: goods made more expensive by tariffs, fertilizer markets roiled by Strait of Hormuz disruptions, and what he described as hundreds of billions of dollars flowing annually into AI data center construction and related infrastructure. "Anything that touches those sectors, the prices are skyrocketing on those parts of the economy," he said.

Ongoing instability in the Middle East has left Kashkari doubtful that relief from elevated energy costs is on the horizon. "I don't trust Iran to honor whatever agreement has been made," he said. "There's some evidence of overnight that they're already reneging on it, so I certainly am not seeing all clear coming out of the Middle East."

Last week's FOMC gathering — at which Kashkari holds a vote this year — left the benchmark rate unchanged in the 3.50%-3.75% range. The projections accompanying that meeting showed at least one rate increase on the forecast for nine of the Fed's 19 policymakers.

Earlier this week, PCE data showed the Fed's preferred price measure running at 4.1% year-over-year through May, a level not seen since April 2023 and the first time the reading has topped 4% in three years. Excluding food and energy, the core reading registered 3.4% — a high not seen since October 2023. The Fed has now watched inflation sit above its 2% goal continuously for more than five years.

A different tone came Thursday from New York Fed President John Williams, who told reporters he anticipates inflation will cool and described the current policy stance as appropriate for the environment. Chicago Fed President Austan Goolsbee, who warned that core inflation remains too high and is moving in the wrong direction, declined to speculate on the rate path.