Washington, May 21, 2026, 02:53 (EDT)
- Most Fed officials said in the minutes they could hike rates again if inflation does not fall below 2%.
- Economists are now talking about rate cuts coming in 2027. Markets have started pricing in a chance of a hike.
- The FOMC meets June 16-17. Markets don’t see a rate change.
Fed minutes out showed most officials pushing back against hopes for rate cuts, as they warned they may have to hike if inflation stays hot. That stance means incoming Chair Kevin Warsh is heading into a more hawkish committee than markets or the White House had figured earlier this year.
The issue is pressing with the Fed’s rate-setting FOMC meeting coming up June 16-17, when it will also update its economic outlook. The Fed left its key federal funds rate steady at 3.50% to 3.75% in April.
Fed minutes out Wednesday showed officials see inflation moving up from global energy costs, tariffs, and impacts tied to the Middle East conflict. A “vast majority” warned that inflation may take longer to get back to the 2% target, and most said “some policy firming” could be needed if price pressures don’t ease. Federal Reserve
Fed divisions show in the minutes. At its April meeting, there were four dissents, Reuters said. That’s the biggest split since 1992. One governor, Stephen Miran, pushed for a 25 basis point cut. Beth Hammack, Neel Kashkari and Lorie Logan all agreed rates should stay put but pushed back against any guidance that kept the door open to easing.
Bond dealers acted quickly. Reuters reported the two-year Treasury yield, often used as a Fed policy barometer, went from just under 3.40% before the U.S.-Israel attacks on Iran to more than 4.10% this week. Rate odds tracked by CME FedWatch using fed funds futures point to investors boosting bets on a hike; traders use those futures to wager on future rates.
Economists are showing more caution. A Reuters poll out Tuesday showed fewer than half now see the fed funds rate dropping this year, compared to over two-thirds in the prior month’s survey. The poll also found 83 out of 101 economists expect rates to hold at 3.50% to 3.75% through the third quarter.
“Both hikes and cuts are feasible,” Aditya Bhave, head of U.S. economics at Bank of America, told Reuters. He said a cut looked more likely next year than this year. Scott Anderson, chief U.S. economist at BMO Capital Markets, said there was a “big risk” of repeated shocks changing the inflation regime. Reuters
Philadelphia Fed President Anna Paulson told markets on Tuesday that policy remains “mildly restrictive” and appropriate for the moment. Paulson said it was healthy for markets to price in the chance of a longer hold or more tightening. Reuters
Paulson basically sticks near the new consensus: the Fed is in no rush to cut, isn’t promising hikes, and wants a lot more inflation progress before moving. She said rate cuts won’t make sense unless the drop in inflation keeps going. She noted that risks ahead will depend on how things play out in the Middle East.
The Fed isn’t the only one considering its next move. Olli Rehn at the European Central Bank told Reuters a rate hike could come in June if the oil spike hits trust, but he added there aren’t many signs yet of inflation sticking around. In Japan, Bank of Japan board member Junko Koeda said rate increases should happen at the right pace, cautioning that Middle East price risks might push underlying inflation above the central bank’s target.
Fed staff said inflation should cool again after the first half of the year, as effects from conflict and tariffs fade. The main risk for those seeing a hold or hike is that the shock passes quicker than expected. Some policymakers noted they might support rate cuts later this year if disinflation returns or the labor market loses steam.
June still looks like a hold. Ryan Sweet, chief global economist at Oxford Economics, told Reuters it’s going to be tough for the Fed to build consensus on rates, new chair or not. “Will be a difficult task,” he said. Now, attention turns to whether the next Fed message is more about patience or hints at hiking. Reuters
