Neel Kashkari, President and CEO of the Federal Reserve Bank of Minneapolis, speaks during an interview with Reuters in New York City, New York, U.S., May 22, 2023. REUTERS/Mike Segar/ File Photo

(Reuters) - Federal Reserve Bank of Minneapolis President Neel Kashkari on Friday said he supported this week's decision to cut the U.S. benchmark short-term interest rate by a quarter of a percentage point, and feels that same-sized rate cuts at each of the Fed's final two meetings of the year will be appropriate.

In June, Kashkari had felt that two quarter-point rate cuts were all that would be needed for the whole year, but a drop in job creation since then that could only be partly explained by falling immigration and likely signals weakening demand for labor helped change his mind, he said in an essay.

"I believe the risk of a sharp increase in unemployment warrants the committee taking some action to support the labor market," Kashkari wrote, adding that he also now feels there's little risk of a sharp rise in inflation from tariffs.

"Unless there is some large increase in tariff rates from here or some other supply side shock, it is hard for me to see inflation climbing much higher than 3% given announced tariff rates and the relatively small share of imported goods in overall U.S. consumption."

Imports account for about 11% of U.S. GDP.

Worries that tariffs could reignite inflation had kept the Fed from cutting interest rates all year. But on Wednesday the central bank decided to lower the policy rate to the range of 4.00%-4.25% after recent data showed monthly job gains had dropped dramatically and the unemployment rate ticked up to 4.3%.

The rate cut was widely expected. And apart from Stephen Miran, the Fed's newest governor who dissented in favor of a bigger rate cut, and one of the seven non-voting Fed bank presidents whose rate-path projection indicated a preference for no change to the policy rate, it had broad support within the Fed.

What the Fed should do next, however, is not so clear, reflecting what Chair Jerome Powell said Wednesday is a "challenging" situation where unemployment could rise, but so too could inflation, leaving the central bank with a tough choice on which risk to respond to.

"For me, the more likely risk is a rapid further weakening of the labor market," Kashkari said as he explained why he feels the Fed should cut its policy rate to 3.50%-3.75% by the end of the year.

If the labor market proves more resilient or inflation rises unexpectedly, he said, "we should be prepared to pause or hold our policy rate. I even remain open to raising the policy rate further if economic conditions warrant it."

At the same time, he said, the Fed could cut rates more quickly if the labor market weakens faster than expected.

Kashkari's view that the Fed should probably cut rates twice more this year is shared by eight of his fellow U.S. central bankers, forecasts published on Wednesday show.

But eight other policymakers feel that the Fed should probably cut just once more, or not at all, the same forecasts show.

That view suggests more caution about inflation.

Kashkari said he believes the neutral rate of interest has risen to 3.1%, implying that Fed policy was not as tight as he had previously thought. It also suggests, he said, that even if the Fed embarks on a series of rate cuts, long-term interest rates might not fall much in response, offering little relief for the housing market.

(Reporting by Ann Saphir; Editing by Kim Coghill)