On June 18, the Federal Reserve announced it would hold its benchmark interest rate at 3.5-3.75% after its first two-day policy meeting under Chairman Kevin Warsh, who replaced Jerome Powell last month.
According to the Fed's statement, the U.S. economy is expanding at a steady pace despite facing significant uncertainties, partly due to the conflict in the Middle East. However, inflation remains above the committee's 2% target, reflecting supply shocks that are pushing up prices in certain sectors, particularly energy.
The decision was fully in line with expectations. The CME FedWatch tool, which tracks the probability of monetary policy changes, recorded a 99% likelihood of rates staying unchanged.
Rising Inflation Pressure
Data from the Consumer Price Index (CPI) report released last week by the Labor Department showed inflation had risen to 4.2%, the highest level in three years. The primary driver was a 23.5% increase in energy prices in May.
However, news of a potential peace deal that could end the U.S.-Iran war and reopen the Strait of Hormuz has driven oil prices to their lowest in three months early this week.
Even if the Strait of Hormuz is reopened soon, supply chain bottlenecks, disrupted energy production, and depleted fuel reserves mean that consumer energy prices could take months to return to pre-war levels.
Outlook for Coming Months
In early December last year, President Donald Trump said he would only appoint a Fed leader if that person agreed to cut rates. But rising inflation driven by energy price spikes from U.S.-Iran tensions has changed the dynamic. Trump has now shifted focus to opposing any rate hikes.
Speaking on NBC's political program Meet The Press, Trump praised Warsh but stressed there was "no reason to raise rates."
Stephen Brown, chief North America economist at Capital Economics, noted: "Even if Warsh feels an obligation to the Trump administration, a too-dovish tone would raise concerns about Fed independence and risk pushing up long-term bond yields. Therefore, a Trump-friendly Warsh may still try to maintain a neutral stance and acknowledge the possibility of rate hikes."
While the Fed held rates at this meeting, CME FedWatch anticipates changes in the coming months. By September, the probability of a rate hike is around 30%; by December, it exceeds 50% if labor market and financial conditions remain stable as they are now.
Capital Economics predicts the Fed will raise rates in December 2027 and again in early 2028. Meanwhile, Goldman Sachs believes the central bank may not cut rates until mid- or late 2027.
