Nearly half of Fed policymakers see a 2026 rate hike in the cards

Nearly half of Federal Reserve policymakers now believe they will need to raise interest rates to combat inflation, a shift from their previous stance of holding borrowing costs steady.

Nearly half of Federal Reserve policymakers have lost faith that merely holding borrowing costs steady ​will be enough to bring inflation back down to their 2% target ​in the face of the oil price surge ‌after ​the Iran war.

Nine of the U.S. central bank's 19 policymakers now believe they will need to raise the Fed's policy rate this year, according to projections published on Wednesday as the Fed announced its decision to leave the policy ‌rate in its current 3.50%-3.75% range. None had that view just three months ago, when the Fed last published its projections. Six of those nine, or nearly a third of the committee, feel more than one quarter-point rate hike will be needed this year, the projections show.

Eight believe that rates ought to stay unchanged, and just one felt a ‌single rate cut would be in order. One policymaker, not named, did not submit a rate-path view. Those views, captured in the Fed's so-called dot ‌plot of individual policymaker's rate-path views, illustrate how quickly the debate within the central bank has flipped from a focus on how long to hold rates steady before cutting them, to a growing worry -- and for a some, a conviction -- that the Fed will need to raise rates to keep price pressures from higher fuel prices from seeping more broadly into underlying inflation.

They also pose a challenge for ⁠new Fed ​Chairman Kevin Warsh, who was picked for ⁠the job by President Donald Trump with the expectation that he cut interest rates, an option that becomes less feasible as broad support for such a move fades. Global oil prices have dropped sharply ⁠since last week when Iran and the U.S. announced a deal to end the conflict and get oil flowing through the Strait of Hormuz again. But it is not clear how ​quickly shipping and exports could recover after the agreement is signed, particularly given the damage that energy facilities sustained during the three-month war.

Fed policymakers typically ⁠have the option of rewriting their dot-plot submissions until shortly before publication, so the views should reflect the latest developments in the Middle East. Inflation has been running above the Fed's 2% target for more than ⁠five ​years.

The projections published on Wednesday show central bankers have become more pessimistic about inflation since March, reflecting the sharp rise in inflation since the start of the war. Inflation by the personal consumption expenditures price index is now seen at 3.6% by the end of the year, based on the median policymaker view. In March ⁠policymakers expected year-end PCE inflation of 2.7%. Core PCE inflation, which strips out volatile oil and food prices, is now seen hitting 3.3%, compared with 2.7% previously. The unemployment rate ⁠is now projected at 4.3% by ⁠year-end, matching the actual reading in May and lower than the 4.4% policymakers had expected in March. The forecast suggests increasing confidence that the labor market is not weakening or in need of support from rate cuts, as some policymakers had worried earlier ‌this year. GDP growth is ‌seen at 2.2% this year, worse than the 2.4% forecast as of March.