Fed to hold rates through 2026, EY's Daco says, as Warsh era begins

The Federal Reserve will hold its benchmark interest rate at 3.50% to 3.75% for the remainder of 2026, according to Gregory Daco, chief economist at EY-Parthenon, who said the central bank's next move will depend on how new Chairman Kevin Warsh navigates a still-elevated inflation backdrop.

"The Fed will be on hold this year," Daco said in an interview Sunday. He added that he wants to see Warsh establish clear communication around the Fed's reaction function, particularly on how the committee weighs sticky inflation against a cooling labor market.

The Fed has held rates steady at its first three meetings of 2026 after cutting by 25 basis points at each of its September, October and December 2025 meetings, bringing the target range down from a peak of 4.50%-4.75%. The Consumer Price Index rose 4.20% over the 12 months through May, still well above the Fed's 2% target and giving the committee little room to ease. The next FOMC meeting is scheduled for late July.

Daco's forecast puts him at odds with markets that had been pricing in at least one quarter-point cut before year-end. A prolonged hold would keep borrowing costs at their highest sustained level in two decades relative to inflation, squeezing rate-sensitive sectors from housing to small business lending. The commentary also introduces uncertainty about 2027 policy direction under Warsh, who took over as chair in early 2026 and has yet to deliver a full dot-plot cycle of his own.

The last time the Fed held rates steady for a full calendar year was in 2023, when the fed funds rate sat at 5.25%-5.50% and inflation was declining from its mid-2022 peak. In that cycle, the hold preceded a series of cuts that began in September 2024. If Daco is correct, the current pause would extend through at least December, with any easing pushed into 2027.

Warsh's leadership adds a layer of uncertainty. As a former Fed governor with a reputation for hawkish leanings, his early statements will be scrutinized for signals on the committee's tolerance for above-target inflation. Daco said he wants to see Warsh articulate a clear framework for balancing the Fed's dual mandate, particularly as fiscal policy and tariff uncertainty complicate the inflation outlook.

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