The Federal Reserve, led by newly appointed Chairman Kevin Warsh, kept its benchmark interest rate unchanged at 3.5% to 3.75% during its June 17th meeting. This decision marks the fourth consecutive meeting where rates have been held steady, and the vote was unanimous among FOMC members. Economists had largely anticipated this move, despite U.S. inflation remaining well above the Fed's 2% annual target, hitting a three-year high.
The FOMC also released its updated Summary of Economic Projections (SEP), which revealed a significant hawkish shift. Nearly half of the policymakers (9 out of 19) indicated they would support a rate hike by the end of 2026. The median rate projection for 2026 in the "dot plot" was raised to 3.8%, a substantial increase from the 3.4% projected in March. This reflects the committee's consensus that inflation is proving more sticky and the path to disinflation slower than previously expected.
Inflation expectations for 2026 were sharply revised upward. The median forecast for the Personal Consumption Expenditures (PCE) index, the Fed's preferred inflation gauge, is now 3.6% by year-end, up from 2.7% in March. Core PCE inflation, which excludes volatile food and energy, is expected to reach 3.3% for 2026, also higher than the 2.7% predicted in March. Officials expect PCE inflation to fall to 2.3% in 2027 and 2.0% in 2028.
The elevated inflation is attributed in part to supply shocks, including rising energy prices resulting from global conflicts and the war in Iran. Despite a recent pullback in oil prices, the strong labor market and inflation data are fueling the hawkish stance. Alan Blinder, former Fed Vice Chairman, noted that markets are interpreting the FOMC meeting as more hawkish than it actually was, while Kay Haigh of Goldman Sachs Asset Management commented that the Fed’s hawkish shift was not solely due to higher energy prices.
