In a marked shift from its previous projections, nine Fed officials forecast at least one interest rate increase this year, while the central bank also removed language from its policy statement that had suggested its next move would be a rate cut.
The unusually brief statement likely reflects the influence of new Fed chair Kevin Warsh, appointed by Trump, who has previously criticised the Fed for commenting too broadly on the economy.
Six policymakers projected two or more rate increases this year, a sharp change from March, when no officials pencilled in a hike and the committee as a whole forecast one cut in 2026.
The shift reflects growing concern about persistent inflation, which is running at its highest level in three years. Several Fed officials have recently warned that higher borrowing costs may be needed if price pressures fail to ease.
Another eight policymakers signalled support for keeping rates unchanged this year, while one forecast a cut. Warsh did not submit an interest-rate projection.
He said he encouraged his colleagues to do so, but he had previously criticised the projections for potentially locking the Fed into a specific policy outlook. The Fed also struck forward guidance from its policy statement.
RelatedWarsh also told reporters at a press conference that he is forming five task forces to examine such areas as how the Fed communicates, the sources of data it uses in making policy decisions, and the frameworks it uses to evaluate inflation, all with the goal of making sure the Fed is “clear-eyed and focused on the future.”
Wednesday’s policy meeting was the first for Warsh, who was appointed by Trump after the president sharply criticised Warsh’s predecessor, Jerome Powell, for not reducing rates deeply enough. The attacks largely backfired because they prompted Powell to stay on the Fed’s governing board, where he voted Wednesday in favour of keeping rates at about 3.6%.
Warsh now faces a difficult choice: The Fed typically seeks to combat inflation by lifting interest rates to slow borrowing and spending and cool the economy. Yet taking such a step would likely attract the ire of the White House and could lift the cost of mortgages, auto loans and other borrowing just before the midterm elections.
If the Iran war is resolved, gas prices will likely continue to decline and inflation may cool in the coming months. But prices of many goods and services — such as clothes, dental care and child care — were rising before the Iran war, and inflation has been above the Fed’s 2% target for five years, suggesting that there may still be inflationary pressures in the economy.
Warsh repeatedly stressed that Fed officials are committed to delivering price stability.
“We’ve missed (on inflation) for five years, and we’re gonna fix that,” he said.
Warsh also faces a sharply different economic environment than when he appeared to campaign for the job of Fed chair last year. Back then, he was outspoken in favour of lower interest rates, as Trump has demanded. He pointed to the development of AI as a technology that could vastly expand the economy's ability to produce goods and services cheaply, which would, over time, bring down inflation.
Even then, many economists were sceptical of his claim. At least in the short run, analysts note that soaring investment in semiconductors and computing equipment is contributing to higher inflation.
Indeed, since the Iran war began on 28 February, inflation has accelerated to a three-year high of 4.2%, lifted mostly by costlier gas stemming from the Iran war. The Fed typically fights higher inflation by raising its key interest rate to cool spending and growth.
Trump has announced an initial peace agreement that could bring the three-month conflict to an end, but it's not clear whether peace will hold. And even if oil flows freely out of the Middle East again, it could take months for prices of gas, groceries and items such as airline fares to cool.
At the same time, hiring has picked up in recent months, removing a key rationale for cutting rates. In January, the Fed forecast that it would reduce rates twice this year, as part of its quarterly economic projections. A big reason for those potential cuts is that employers were shedding jobs, and policymakers worried that the unemployment rate would rise. The central bank typically cuts its key rate to spur economic growth and hiring.
But earlier this month, a government report showed that hiring jumped in May, when employers added 172,000 jobs, the third straight month of solid job gains.
Stuart Clark, portfolio manager at Quilter, said: "This situation is entirely of the US's own making, and with energy prices likely to remain elevated relative to the start of the year, inflation isn't going to suddenly begin to fall."
He added that, given the recent employment data and expectation-beating consumer spending figures released on Wednesday, "it is not out of the realm of possibility that the Fed will have raised rates by the end of this year, instead of cutting them as was expected at the start of 2026."
On Wall Street, the S&P 500 fell 1.4% after the release of the Fed officials' rate expectations. When asked whether changes, such as revising what’s included in the economic projections, could spook markets, Warsh said, “I think financial markets perform best when they react to incoming data. They work less effectively when they ask, ‘How will the Federal Reserve react to that information?’”
