Fed Divided Over Interest Rate Outlook

Fed officials were divided on the future of interest rates and discussed a range of scenarios for the evolution of the economy and monetary policy, minutes from the FOMC meeting in June 2026 showed. Participants generally assessed that upside risks to inflation remained elevated and a few commented that, in light of these developments, there was a case for raising interest rates. Most participants also pointed to scenarios in which, in the context of stable labor market conditions, inflation would remain elevated due to strong AI-related demand, the conflict in the Middle East, or the effects of tariffs. In such scenarios, almost all of these participants indicated that some policy firming would likely be warranted to return inflation to 2%. However, under their most likely economic outlook, many officials expected interest rates to end the year at or slightly below their current level. The Fed kept the federal funds rate unchanged at 3.50%-3.75% in June, in line with expectations.

Inflation risks have eased in recent weeks, but the US central bank remains committed to restoring inflation to its 2% target, Federal Reserve Chair Kevin Warsh said at the ECB’s annual Forum on Central Banking in Sintra, Portugal. Warsh stressed that delivering price stability remains the Fed's primary objective, while noting that the strategy to achieve it will continue to evolve. Warsh also underscored the Fed's independence in setting monetary policy, dismissing any suggestion that political pressure would influence its decisions. The Fed chief reiterated that the central bank will no longer provide traditional forward guidance on future interest-rate decisions, signaling a shift in its communication approach. He also declined to comment on the outlook for the upcoming policy meeting, saying decisions will be based on incoming data. Last month, the Fed held rates steady but signaled growing support among officials for additional hikes later this year as inflation remains elevated.

The Fed kept the federal funds rate unchanged at 3.50%-3.75% for a fourth consecutive meeting in June 2026, in line with expectations. This is the first meeting under new Fed Chair Kevin Warsh. New economic projections show that 9 officials see at least one rate hike this year, with 6 anticipating at least two. Another 9 expected no move or a cut. Only 18 officials out of 19 entered their projections for rates at the end of 2026, as the new Fed Chair did not submit his forecast. Meanwhile, GDP growth is seen lower in 2026 (2.2% vs 2.4% in March) but the forecast for 2027 was kept at 2.3%. PCE inflation was revised sharply higher to 3.6% from 2.7% for this year and for 2027, it was also raised to 3.3% from 2.7%. Policymakers noted that economic activity is expanding at a solid pace despite elevated uncertainty that owes, in part, to the conflict in the Middle East. Job gains have kept pace with the workforce while inflation remains elevated relative to the 2% goal.