Key Takeaways
- Analysts expect the Fed to leave interest rates unchanged at its June meeting, but remove a bias toward rate cuts amid concerns about above-target inflation.
- A strong labor market, sharply higher oil prices, and an uncertain inflation outlook could prod the Fed to hike rates later this year.
- Warsh is expected to begin an effort to change the way the Fed communicates and implements monetary policy.
The consensus is certain that when Federal Reserve officials meet this week, they’ll keep interest rates steady. But there are unknowns concerning the economy and how the new chair, Kevin Warsh, will manage the central bank.
Fed officials face a resilient job market and consumer spending, as well as above-target inflation. That said, hot price readings could cool later this year, since upward pressure is currently driven by the energy shock from the Iran war. These factors have analysts questioning whether the Fed will remove its bias toward lowering rates and perhaps raise them later this year, even as Warsh takes the reins while President Donald Trump pressures the central bank to cut.
There will be another focus at this week’s meeting, which concludes on Wednesday. Fed-watchers expect that Warsh will attempt to remake certain aspects of the Fed’s communication and policymaking stance. While it’s unclear how much will change with his first meeting, he is expected to:
- Reduce the forward-looking guidance from the Fed on its rate expectations.
- Perhaps do away with the so-called “dot plot” of member forecasts (Warsh is seen potentially not contributing a “dot” at the coming meeting).
- Reduce the frequency of press conferences.
On the policy front, Warsh has argued for the Fed to rely less on using its balance sheet—where it buys bonds in the open market securities to influence rate markets—and instead lean more on its federal-funds rate targeting. Analysts will also be listening closely to Warsh’s take on artificial intelligence and the economy, with an expectation that he will focus on the potential for AI to reduce longer-term inflation pressures.
The Fed is expected to maintain its current target range of 3.50%-3.75% during its June 16-17 meeting. That said, pressures are building for a rate increase later this year, as the labor market remains strong, the inflation outlook is uncertain, and oil prices remain sharply higher than a year ago as the Iran war grinds on.
Oxford Economics lead US economist Nancy Vanden Houten doesn’t expect a change in rates in June, but she thinks “there will be a change in the language” that has an easing bias. “At the last meeting, some members wanted more open-ended language [rather than] signaling that the next move would be a rate cut.” While the bond market is priced for a rate hike later this year, Vanden Houten forecasts a December rate cut. But “we acknowledge some risk that it could come later than December,” she says.
Employment, Prices, and War Boost Inflation Concerns
The labor market has remained strong, and inflation remains contained, although inflation will be widely watched, given the Iran war. Complicating the outlook is new Fed chief Kevin Warsh, who opposes many of the Fed’s current practices, including the practice of issuing forward guidance.
Hiring picked up speed across much of the US economy in May, with gains well above expectations, providing evidence of a labor market that has recovered from a swoon at the start of the year. Meanwhile, consumer prices rose 4.2% from year-ago levels in May after increasing 3.8% in April. Year-over-year core CPI (which excludes volatile food and energy costs) rose 2.9%, outpacing the April rate of 2.8%. While the numbers were in line with forecasts, the energy-driven rise in inflation has some analysts seeing a rate hike as more likely than not this year.
Much depends on whether ships can sail the currently blockaded Strait of Hormuz. Jeffrey Roach, Chief Economist for LPL Financial, wrote: “If the Strait of Hormuz remains disrupted through the Labor Day weekend, we would expect the energy shock to affect additional sectors and heighten uncertainty about the future path of monetary policy. Rate expectations could be further upended if this crisis lasts throughout the summer.”
How Likely Is a Rate Hike Later in 2026?
A hike isn’t imminent, but the Fed is uneasy about inflation, and expectations are building that the governors will vote to raise the funds rate later this year. They’re “at the ‘thinking about thinking about’ rate hikes part of the cycle (to use prior Fed Chair Powell’s language),” writes Don Rissmiller, chief economist at Strategas.
On June 11, the European Central Bank hiked its key interest rate by 0.25 percentage points to 2.25%, saying, “the war in the Middle East is generating inflation pressures.” This marks its first rate hike since September 2023.
“This Fed—as well as most developed-market central banks—will focus on this higher inflation, and thus policy will be more restrictive from here,” says Rick Rieder, BlackRock’s chief investment officer of global fixed income.
At the very least, hopes earlier this year for a rate reduction have been dashed. Goldman Sachs economist David Mericle wrote: “We no longer expect the Fed to lower interest rates this year … Instead, we expect the FOMC to delay further cuts until core PCE inflation nears 2%, likely well into 2027.”
Will Warsh Drop Fed Guidance?
Warsh steps into the role as Fed chair, even as the previous chair, Jerome Powell, remains on the Fed’s Board of Governors, allowing him to vote on the FOMC’s interest rate decisions until his term expires in 2028.
Warsh may change how the Fed communicates forward guidance in its statements following FOMC meetings, which economists watch closely. Currently, the guidance is for easing. “The data and developments since the last meeting should be enough for the FOMC to drop the easing bias in next week’s statement,” writes Douglas Porter, chief economist at BMO Capital Markets.
Warsh also dislikes publishing the widely watched chart of the governors’ expectations for the appropriate fed-funds rate, commonly known as the dot plot. He argues that it conveys stale information. The dot plot shows each FOMC member’s anonymous expectations for interest rates at future meetings.
At Goldman Sachs, economists expect the Warsh Fed to see incremental and not wholesale changes to how the central bank communicates: “While we do see some potential areas for improvement, we do not expect any major near-term changes. The FOMC just had a lengthy discussion of its communication practices last year in its framework review and was unable to agree on any changes. In addition, because making the reaction function more transparent should itself support macroeconomic stabilization, we think it would be hard to justify moving in the opposite direction."
What’s Ahead for Interest Rates?
The market is currently pricing in at least one 0.25-percentage-point increase in the federal-funds rate over the next six months from its current target range of 3.50%-3.75%. By year’s end, roughly 42% participants expect the target range to be at 3.75%-4.00%, while 14% expect 4.00%-4.25%.
Coming into 2026, markets expected the Fed to be cutting rates. But the renewed inflation increase, fueled by the jump in energy prices caused by the Iran war, has changed the calculus, though many economists aren’t ready to call a rate hike a certainty.
“Given the improvement in recent labor market data and ongoing concerns about inflation, the June dot plot will likely signal that more FOMC members think the central bank’s next move should be a hike, rather than a cut (Just one member thought this back in March) ... Even so, the Fed is unlikely to signal a hike is imminent, and the many crosswinds buffeting the economy could change the Fed’s thinking by the time they are ready to act,” writes Bill Adams, chief US economist at Fifth Third Commercial Bank.
