Key Takeaways:
Former Federal Reserve board nominee Judy Shelton said she does not expect the central bank to raise interest rates this year, pushing back against market pricing that has swung toward expecting a hike.
The Fed will hold its benchmark rate at 3.50% to 3.75% for the remainder of 2026, former Federal Reserve board nominee Judy Shelton said, diverging from financial market bets that have priced in two quarter-point increases by year-end.
"The economy is showing resilience, but raising rates now would risk choking off growth when inflation is already moderating from its peak," Shelton said in an interview on Maria Bartiromo's Wall Street. "I don't see the case for a hike this year."
Her view aligns with a Reuters poll published June 26 showing over three-quarters of economists — up from roughly half last month — expect the fed funds rate to remain unchanged through end-2026. That contrasts with the CME FedWatch tool, which as of this week showed a 62% probability of a rate hike at the September meeting. Minneapolis Fed President Neel Kashkari was among nine of 19 Fed officials who penciled in at least one hike in the June dot plot, according to the central bank's quarterly projections.
The divergence between Shelton's outlook and market pricing underscores the uncertainty surrounding the Fed's path under new Chair Kevin Warsh, who at his first press conference on June 17 signaled a return to prioritizing inflation over employment. With inflation running above 4% — more than double the Fed's 2% target — and oil prices retreating from war-driven highs, the next two months of data will determine whether the central bank can afford to stay on hold.
A Divided Fed Faces Conflicting Signals
The Federal Open Market Committee held rates steady at its June 17-18 meeting, as widely expected, but the accompanying dot plot revealed a committee split. Nine of 19 policymakers saw at least one rate increase by end-2026, while the median projection pointed to no change. Chair Warsh, who abstained from the dot-plot projections, used his debut press conference to emphasize returning inflation to 2% as the central bank's primary objective, with minimal mention of the labor market.
The shift in tone marked a departure from the Powell era, when forward guidance was a cornerstone of Fed communication. Warsh signaled a move toward a stripped-down approach reminiscent of former Chair Alan Greenspan, issuing a brief policy statement and launching a broad review of Fed operations.
"The Fed still needs forward guidance to get its message across," said Stephen Juneau, a U.S. economist at Bank of America, which now expects three rate hikes this year — the most aggressive forecast in the Reuters survey. "There are more pros than cons to maintaining some level of guidance."
Inflation, Oil, and the Political Calculus
Inflation remains the Fed's primary headache. The personal consumption expenditures price index is running above 4%, the highest in more than three years, fueled in part by President Donald Trump's sweeping import tariffs. The higher cost of living has become a political liability for Trump and his Republican Party ahead of November midterm elections.
Yet oil prices have fallen close to where they stood in February, before the U.S.-Israeli conflict with Iran began, providing some relief. The combination of easing energy costs and still-elevated core inflation creates a delicate balancing act for Warsh.
"The public does not like higher interest rates but they dislike inflation even more," said Alex Pelle, senior U.S. economist at Mizuho Securities USA. "There will always be politicians who have opinions on what the Fed should or should not be doing. But ultimately, the job is too big to let the political considerations dominate."
Fifteen forecasters in the Reuters poll, including five primary dealers, now expect at least one hike this year versus nine predicting cuts — the first time since 2023 that hawks have outnumbered doves. Bank of America's Juneau said the shift represents "a materially hawkish surprise" that indicates the Fed's reaction function has turned.
For borrowers, the stakes are clear. Mortgage rates are expected to stay elevated at around 6.4% for the rest of the year, according to Fannie Mae's June forecast, while credit card and auto loan rates could rise further if the Fed delivers a hike. The next FOMC meeting is scheduled for Sept. 15-16, when markets will get the clearest signal yet of Warsh's policy direction.
This article is for informational purposes only and does not constitute investment advice.
