Fed Holds Rates Steady, Signals Stronger Likelihood of Hike This Year

The US Federal Reserve (The Fed) maintained its benchmark interest rate at 3.50-3.75%. However, the central bank signalled it will likely raise rates later this year amid mounting concerns over inflation that remains above its 2% target. The Fed announced its rate decision on Wednesday US time or early Thursday Indonesian time (18 June 2026) after a two-day Federal Open Market Committee (FOMC) meeting. The Fed held rates at 4.25-4.50% until August 2025 before cutting them in September, October, and December 2025 to 3.50-3.75%. It has since held the benchmark rate steady from January to June 2026. In its official statement, the Fed noted that US economic activity continues to grow at a solid pace. However, inflation remains above the 2% target. The Fed therefore reaffirmed its commitment to restoring price stability. “Economic activity has continued to expand at a solid pace, though uncertainty remains elevated, partly due to the conflict in the Middle East. Productivity growth and capital investment remain robust. Job gains have kept pace with labour force growth, while the unemployment rate has been relatively unchanged. Inflation remains above the Committee’s 2% objective, partly reflecting supply disruptions that have boosted prices in some sectors, including energy,” the Fed stated. The Fed also affirmed it would maintain a policy of ample liquidity reserves in the banking system. This statement indicates no near-term plans to reduce the central bank’s roughly US$6.7 trillion bond holdings, despite the measure previously being supported by new Fed Chair Kevin Warsh. Notably, the decision was approved unanimously, following a debate over forward guidance that triggered three dissenting votes at the April meeting. At that time, some regional Fed presidents wanted the central bank to keep open the possibility of both rate hikes and cuts. A striking change in the latest statement was its brevity. While the statement following the 29 April meeting contained 341 words, the latest version comprised only 130 words, briefly summarising economic conditions and reaffirming the Fed’s commitment to controlling inflation. The Fed also removed all forward guidance language, marking early evidence of change under Warsh’s leadership. In his press conference, Warsh stressed that the 2% inflation target would not change. He said discussions about altering the target would only become relevant once the Fed has successfully brought inflation back to that goal. “The commitment to achieving that target is strong, unanimous, and unambiguous,” Warsh said. The statement came as US inflation remains far from the target. US consumer inflation in May 2026 was recorded at 4.2% year-on-year, while the Personal Consumption Expenditures (PCE) index stood at 3.8% in April. Warsh also acknowledged the Fed had failed to effectively communicate its commitment to fighting inflation in recent years. Consequently, one of the newly formed task forces will specifically evaluate the central bank’s communication strategy. When asked about his relationship with President Donald Trump, Warsh declined to comment. However, his position is seen as different from that of Jerome Powell, who was frequently targeted by Trump’s criticism. Warsh began his tenure with open support from the White House but still faces the challenge of maintaining the Fed’s independence amid political pressure to lower rates quickly. The latest policy statement removed language previously used to indicate the possibility of further rate cuts this year. Warsh said the Fed deliberately omitted forward guidance because it was deemed unsuitable for current economic conditions. “Regarding the outlook for monetary policy, I can’t give you guidance on what we will do next. The good news is we will meet again in six weeks,” Warsh said. He also announced the formation of several task forces to review various operational aspects of the central bank, from communication strategy and balance sheet usage to data sources and the inflation control framework. Of the 19 Fed policymakers, only 18 submitted rate projections for the released dot plot. While the identity of the missing dot is unknown, Warsh confirmed he did not submit a personal projection. He also cautioned markets against relying too heavily on the dot plot. “I reviewed the dot plot, and when I looked at all the projections that came in, I realised they were all done in pencil, complete with a big eraser,” he said, hinting that the projections could change at any time. Based on the 18 projections submitted, the median forecast for the federal funds rate at end-2026 rose to 3.8%, up from 3.4% in the March projection. This indicates that a majority of Fed officials now see at least one rate hike this year as necessary. However, views remain divided, with eight officials expecting no change by year-end, one still seeing a possible rate cut, and nine forecasting at least one increase.