Fed holds steady as half of committee expects rate hike in 2026

The Fed held rates steady Wednesday but revealed half its voting members now expect a rate hike this year, a hawkish pivot as inflation persists.

The Fed held its benchmark rate at 3.5% to 3.75% for a fourth straight meeting Wednesday, with six of 12 voting members projecting a rate increase before year-end — the clearest signal yet that inflation remains the primary threat.

"The story at this meeting is not what's going to happen with rates — that's pretty much a foregone conclusion," said Elizabeth Renter, senior economist at NerdWallet. "The most interesting thing is Warsh's debut and what that means for how we see the Fed moving forward."

The decision arrived as inflation hit 4.2% in May, the highest in three years, driven by the Iran conflict's disruption of oil supplies through the Strait of Hormuz. The benchmark rate now stands at 3.5% to 3.75%, down from a 2023 peak but well above the near-zero level set during the pandemic. Markets reacted with a selloff in Treasuries, pushing the two-year yield up 8 basis points, while the S&P 500 fell 0.6% as traders repriced the probability of tighter policy.

The hawkish pivot puts new Chair Kevin Warsh in a delicate position. President Donald Trump has publicly pushed for lower rates, and Warsh — a former Fed governor with a reputation as an inflation hawk — must now navigate between White House pressure and a committee that increasingly favors tightening. Futures markets now price a 58% probability of at least one quarter-point hike by December, according to the CME FedWatch Tool, up from roughly 40% before the meeting.

Six Voters Flip to Hike Mode

The June Summary of Economic Projections showed a dramatic shift from the March edition, when the median policymaker still penciled in one rate cut for 2026. Now, half of the 12 voting members see rates higher by year-end, reflecting the impact of three consecutive months of accelerating inflation. The last time the Fed's dot plot showed a majority leaning toward a hike mid-cycle was in 2023, when the central bank delivered its final quarter-point increase before pausing.

Warsh's First Test

Warsh, who began his four-year term as chair last month after succeeding Jerome Powell, addressed reporters for the first time in his new role at the 2:30 p.m. press conference. He emphasized the Fed's commitment to delivering price stability and said the reopening of the Strait of Hormuz following the U.S.-Iran deal announced Monday should help ease supply-side pressures over time. But he stopped short of signaling any near-term easing, noting that the labor market remains resilient — nonfarm payrolls grew more than expected in May — and that inflation has not yet shown a sustained decline toward the Fed's 2% target.

Former Chair Jerome Powell, who remained on the Fed's board of governors after his term expired, cast a vote on the rate decision. The Justice Department dropped a criminal probe into Powell in April, and he has said he will stay on the board for an indeterminate period.

For investors, the message is clear: the era of rate cuts is on hold, and the next move could be higher. If oil prices continue to fall as the Iran deal takes effect, inflation may moderate enough to keep the Fed on the sidelines. But if price pressures persist, Warsh's first major policy move as chair could be a hike — a decision that would ripple through bond markets, equities, and the dollar.

This article is for informational purposes only and does not constitute investment advice.