Nearly half of the Federal Reserve’s policymakers have grown doubtful that simply keeping borrowing costs where they are will be sufficient to drive inflation back down to their 2% goal, particularly as oil prices have spiked following the war with Iran.
According to projections released Wednesday, nine of the central bank’s 19 policymakers now expect the Fed’s policy rate will need to increase before the year is out. That marks a striking reversal from just three months ago, when the Fed last released such projections and not a single policymaker anticipated a rate hike. The Fed announced it would leave its policy rate in its current 3.50%-3.75% range.
Of those nine policymakers expecting a rate increase, six — representing close to one-third of the full committee — believe more than one quarter-point hike will be necessary this year. Eight policymakers believe rates should remain at their current level, while just one favored a single rate cut. One policymaker did not submit a rate-path projection.
These individual forecasts, displayed in what is known as the Fed’s dot plot, reveal how swiftly the internal conversation at the central bank has changed — shifting from a debate about how long to hold rates before cutting them, to a growing concern that rate increases may be needed to prevent rising fuel costs from pushing broader inflation even higher.
The shift also creates a difficult situation for new Fed Chairman Kevin Warsh, who was selected for the position by President Donald Trump with the expectation that he would lower interest rates — a path that appears increasingly difficult as support for cuts continues to erode.
Global oil prices have fallen sharply since last week, when Iran and the United States announced a deal to end the conflict and restore oil shipments through the Strait of Hormuz. However, it remains uncertain how quickly shipping and exports can bounce back after the agreement is finalized, especially given the damage that energy infrastructure suffered over the course of the three-month war.
Fed policymakers generally have the ability to revise their dot-plot submissions until shortly before they are published, meaning the projections should reflect the most recent developments in the Middle East.
Inflation has remained above the Fed’s 2% target for more than five years.
The Wednesday projections indicate that central bankers have grown more pessimistic about inflation compared to their March outlook, a reflection of how sharply prices have climbed since the war began.
Based on the median policymaker estimate, inflation as measured by the personal consumption expenditures price index is now expected to reach 3.6% by year’s end. Back in March, policymakers had forecast year-end PCE inflation of 2.7%.
Core PCE inflation — which excludes the more volatile categories of oil and food — is now projected at 3.3%, up from the prior forecast of 2.7%.
The unemployment rate is projected to reach 4.3% by the end of the year, which matches the actual reading recorded in May and comes in below the 4.4% that policymakers had anticipated in March. That forecast reflects growing confidence that the job market is holding steady and does not require the support of rate cuts, a concern some policymakers had raised earlier in the year.
GDP growth is now forecast at 2.2% for the year, a slight downgrade from the 2.4% projection made in March.
