The Federal Reserve left interest rates unchanged at 3.50%-3.75% on Wednesday in Kevin Warsh‘s first meeting as chair. However, the Fed’s latest forecasts show that policymakers are becoming more concerned about inflation and are increasingly open to raising rates again if price pressures remain high.
The Fed’s updated economic projections, released alongside the decision, paint a much more hawkish picture than they did in March. Officials now expect inflation to stay higher for longer and no longer see rate cuts as likely this year.
More officials now think rates could rise
The biggest surprise came from the Fed’s “dot plot,” which shows where policymakers think interest rates could be in the future. Out of 18 officials who submitted projections, nine now expect interest rates to be higher by the end of 2026 than they are today.
Eight officials think rates will stay where they are, but one still expects a rate cut. This shows that many policymakers are no longer asking when rates can be lowered. Instead, they are considering whether rates may need to go even higher to fully control inflation.
Inflation remains the Fed’s biggest concern
The main reason behind the more hawkish outlook is inflation. Fed officials now expect inflation to end 2026 at 3.6%, up sharply from the 2.7% forecast they made in March. Core inflation, which excludes food and energy prices, is also expected to be higher than previously thought. Although the Fed still expects inflation to gradually fall back toward its 2% target over the next few years, officials now believe that process will take longer than they expected just three months ago.
Economy expected to grow a bit more slowly
At the same time, the Fed slightly lowered its forecast for economic growth. Officials now expect the economy to grow by 2.2% in 2026, compared with a previous estimate of 2.4%. That creates a difficult balancing act for policymakers. Slower growth would normally call for lower interest rates, but persistent inflation makes it harder for the Fed to ease policy. Regardless of concerns about inflation, the Fed’s outlook for the labour market changed very little. Officials expect the unemployment rate to end 2026 at 4.3%, slightly better than the 4.4% forecast in March.
Fed sees more risk of inflation than recession
Most policymakers said inflation risks remain tilted to the upside, meaning they see a greater chance that inflation could end up higher than expected rather than lower. That helps explain why so many officials are now willing to consider additional rate hikes despite keeping rates unchanged at this meeting.
Warsh did not submit his own rate forecast
Unlike other policymakers, Warsh chose not to submit his own interest-rate projection. During his press conference, he said he has long opposed “forward guidance,” the practice of indicating where rates might go in the future and prefers policymakers to respond to incoming economic data rather than commit to a future path. Warsh also announced a review of the Fed’s communications strategy, including its projections and use of the dot plot.