Despite inflation risks, the Fed seemingly dismissed possible rate increases
As everyone expected, the Federal Reserve held rates steady on Wednesday, citing continued threats to both sides of its dual mandate.
The central bank kept the fed funds rate at a range between 3.50% and 3.75%. It also released its “dot plot,” or a forecast of where the 19 Fed members think rates will go over the next couple of years.
Notable in the dot plot is that more members were predicting fewer cuts during that time. However, despite inflation being elevated due to the ongoing Iran war, there was almost no sign of potential rate hikes from any of the 19 members.
In fact, it barely came up at all during Fed chair Jerome Powell’s Wednesday press conference, as he largely dismissed the threat of elevated energy prices, while also admitting that nobody was 100% sure of how things would end up.
Melissa Cohn (pictured top), regional vice president at William Raveis Mortgage, was surprised that there wasn’t more talk about potential rate hikes if inflation got further out of control.
“The only thing that maybe surprises me is maybe they could have been a little more hawkish,” Cohn told Mortgage Professional America. “They talk about the inflationary pressures from higher oil prices and that they still expect to have a rate cut this year, and another rate cut in 2027. But they didn't mention the possibility that inflation could get out of hand, and that there could be the potential for a rate hike.”
Dodging the question
When the Bank of Canada held rates on Wednesday, Canadian central bank governor Tiff Macklem didn’t back away from the possibility that soaring inflation caused by geopolitical turmoil could cause them to consider rate hikes rather than rate cuts.
“The longer the conflict lasts and the wider it gets, the bigger the risks,” Macklem said. “As those risks evolve, as the economy plays out, we’re prepared to respond as needed. We could keep holding the interest rate where we are. If energy prices stay high and we see evidence that it’s generalizing and becoming more persistent, we can raise the policy interest rate to cool inflation.”
However, when asked about what it might take for the Fed to consider rate hikes, Powell dismissed the question.
“We’re prepared to do what needs to be done, but I wouldn’t want to hypothesize about what that might be,” Powell said about what might trigger a rate hike.
Cohn was surprised by how optimistic Powell was that the economy would reach the Fed’s 2% inflation goal later in the year, which would negate any possibility of a rate hike.
“Powell was optimistic that the rate of inflation would settle down closer to their 2% target at some point next year,” Cohn said. “And they don't appear to be overly concerned about the slight rise in inflation that we're seeing now. I think he said that a lot of it was goods inflation, and that he expected that that would moderate as the tariffs resolve, and hopefully as oil prices come down. I thought that his comments were more dovish than I expected.”
One of the reasons Powell may have avoided talking about any potential cut was to avoid even more scrutiny from the White House. Powell even pushed back at the idea that the economy was entering a period of stagflation.
“I would reserve the term stagflation for a much more serious set of circumstances. That is not the situation we’re in,” Powell told reporters.
Bond markets jump, rates to follow?
In the aftermath of the Fed hold and Powell’s comments, the long-term bond markets jumped. The 10-year Treasury, which is most closely tied to the 30-year mortgage rate, was up 6 basis points to 4.265%. This will likely lead to an increase in mortgage rates later this week.
CME FedWatch, which had been showing one cut later in the year, updated to show no cuts over the rest of 2026 following the press conference. FedWatch, which tracks the probability of changes to the fed rate based on the 30-day fed funds futures prices, now predicts the next 25-basis-point rate cut in June 2027.
One of the reasons the markets could be backing off on cuts could have to do with how Powell characterized where rates are currently, saying they were right on the borderline between being restrictive and non-restrictive.
“We also think it is important to keep policy mildly restrictive or close to that,” Powell said. “Not too restrictive because of the weakness in the downside risk of the labor market. We're balancing the two goals in a situation where the risks to the labor market are downside, which would call for lower rates, and the risks to inflation are to the upside or higher rates, not cutting.
“We're in a difficult situation. We feel like the framework calls to balance the risks. We feel that where we are now is on the higher borderline of restrictive versus non-restrictive. We feel like that is the right place to be.”
Powell staying on for now
The Fed chair was asked about staying on as chair if his presumed replacement, likely Kevin Warsh, wasn’t confirmed right away. He confirmed that he would.
“If my successor is not confirmed by the end of my term as chair, I would serve as chair pro tem until he is confirmed,” Powell said. “That is what the law calls for. That is what we have done on other occasions, including involving me. And that’s what we will do in this situation.”
Powell also said he would remain on the board until the investigation by the Justice Department was concluded. Once his term as chair ended and the investigation was closed, Powell said he still wasn’t sure if he would stay on the Fed beyond that.
“On the question of whether I will leave while the investigation is ongoing, I have no intention of leaving the board until the investigation is well and truly over with transparency and finality,” he said. “On the question of whether I will serve as a governor after my term ends and the investigation is over, I have not made that decision yet. I will make that decision based on what I think is best for the institution and for the people we serve.”
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