While policymakers kept rates unchanged at 3.5% -3.75%, nine of the 18 officials now expect a rate hike, as inflation projections were revised higher from 2.7% in March to 3.6% by the end of 2026, and to 2.3% for 2027 from 2.2%.
Much of that deterioration came from events in the Middle East, especially disruptions in the Strait of Hormuz, which hit global energy supplies and pushed oil prices higher. Now that things seem to be easing, with shipping resuming and crude back below $75 a barrel, does that mean inflation could cool fast enough for the Fed to cut rates before year-end?
Not according to the CME FedWatch Tool, where the odds of rates being at 3.25%–3.50% by January 1st, 2027 are… 0%.
And for good reason.
Although headline PCE inflation accelerated to 4.1% year-over-year in May, while core PCE remained elevated at 3.4% and broadly in line with expectations, both are still well above the Fed’s 2% target. Lower energy prices should eventually help, but policymakers know disinflation doesn’t happen overnight.
On top of that, the U.S. economy continues to hold up well. First-quarter GDP was revised higher to 2.1%, and the University of Michigan Consumer Sentiment Index rose to 49.5 in June from 44.8 in May. While confidence remains weak by historical standards, the direction of travel is positive.
Hence, the dollar (DXY) strengthened, while gold extended its decline.
Now all eyes are on this week’s labor market data. Payroll growth is expected to come in at around 115,000 jobs, down from 172,000 previously. If the numbers disappoint, markets could start pricing in a more dovish Fed. If, in turn, employment stays strong, rate-cut expectations will likely fade further.
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