By Nick Timiraos
Federal Reserve officials hinted more strongly at the possibility that their next move will be to raise interest rates when they held them steady Wednesday -- a notable shift at Kevin Warsh's first meeting as chairman.
For weeks, investors had been bracing for a Fed that would keep rates higher for longer, selling off bonds and driving up long-term yields. The decision to hold rates in the current range between 3.5% and 3.75% was unanimous.
The Fed released a much sparser statement explaining its decision that avoided any hint on its next move.
But a significant cohort of the participants at the rate-setting meeting -- nine of 19 officials, not all of whom have a vote -- projected that at least one rate hike would be warranted by year's end. There had been none who did so in March. Another eight thought the Fed could hold steady into next year. Only one official projected a cut this year, down from 12 in March.
(The projections included only 18 submissions from the 19 participants. Because every other official has submitted them before, the missing one was likely Warsh.)
That it fell to Warsh to ratify the turn was the twist. He was President Trump's pick, chosen after the president vowed to name only someone committed to lower rates. Instead, Warsh's first meeting revealed a committee rowing away from cuts and toward hikes.
The U-turn reflected an economy that has run hotter than the Fed expected. Inflation has reaccelerated this year -- driven up by the energy shock from the Iran war and a surge in demand tied to the boom in artificial intelligence. A labor market officials had feared was weakening instead held firm.
After describing the state of the economy, the Fed's policy statement delivered a sober promise: "The committee will deliver price stability."
After describing the state of the economy, the Fed's policy statement delivered a sober promise: "The committee will deliver price stability."
For households, the message is that relief on borrowing costs is unlikely to arrive soon. The Fed's benchmark rate most directly affects short-term borrowing such as credit cards and auto loans, which will stay elevated as long as the Fed holds. But the costs that matter most to many families -- mortgage rates -- track longer-term Treasury yields, and those have been climbing as investors brace for a Fed that sits on its hands.
Warsh faces a highwire act at his first press conference, with investors still unsure what he believes. Sound too hawkish, and he risks puncturing the recent stock-market rally. Signal too much eagerness to cut, and he risks spooking the bond market, driving up long-term yields. If those rates climb far enough, that could also weigh on stocks.
Wednesday's decision capped a remarkable migration. Three years ago, the Fed had sprinted to lift rates to a two-decade high. In September 2024, it began cutting, lowering them six times before pausing at the end of last year. Wednesday, it signaled rates could stay put well into the future.
At their previous meeting in April, the Fed's official policy statement drew four dissents -- the most since 1992. At that time, three regional Fed presidents had wanted the tilt toward lower rates removed altogether. Wednesday's shift completed the turn the dissenters had pushed for.
The pivot tracked an economy that has perked up. That has officials questioning whether policy is as restrictive as they thought. A negotiated end to the Iran war could pull energy and commodity prices back down. But the deeper problem would remain. A run of disruptions -- the pandemic, Russia's invasion of Ukraine, last year's tariffs and now the war -- has eroded the Fed's confidence that underlying inflation will return to the Fed's 2% goal.
Some officials worry it could lodge above that level long enough to unmoor the public's expectations of future inflation. In addition, because inflation has climbed this year while the Fed held rates steady, the actual cost of borrowing money could get cheaper on its own -- a passive easing of policy, some officials and economists argue, into an economy that no longer needs it.
"They're basically in place for a while, probably," said William English, a former senior Fed adviser who now teaches at the Yale School of Management. "The world is a more than usually uncertain place right now, but to think that the next move could well be up seems reasonable."
Beneath the shocks runs a more durable force: the AI boom. The build-out of data centers and the power to run them has poured spending into the economy, and a related stock-market surge has left wealthier households spending more.
Once expected to push prices down, AI increasingly looks like a near-term source of inflation. The early view "could be right," said James Egelhof, chief U.S. economist at BNP Paribas. "But we have to make monetary policy for today, not for the 2030s." He expects the Fed to begin raising rates in December.
Jeffrey Cleveland, chief economist at Payden & Rygel, doubts it will come to a hike. He expects the next move to be a cut, albeit not anytime soon, and agrees an extended hold is warranted. Underlying inflation has proven stickier than he expected this year and a labor market he thought would weaken has instead held firm.
What he doesn't see is a case for raising rates -- that, he said, would take accelerating wage growth or signs that Americans had begun to expect higher inflation for the long haul. He sees neither. "This is not 2022," he said.
Write to Nick Timiraos at Nick.Timiraos@wsj.com
(END) Dow Jones Newswires
June 17, 2026 14:20 ET (18:20 GMT)
Copyright (c) 2026 Dow Jones & Company, Inc.
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