Durrant Pate/ Contributor

The Federal Open Market Committee voted unanimously, 12 to 0, yesterday to keep the federal funds rate unchanged at a target range of 3 1/2 to 3 3/4 per cent. 

The decision signals that policymakers remain in a holding pattern, as they wrestle with a troubling jump in inflation and an economy that, despite geopolitical headwinds, continues to expand at a respectable pace. The Fed’s projections point to inflation returning to the 2 per cent target only in 2028, meaning Americans face at least two more years of above-target price pressures. 

Officials also signalled a longer-run federal funds rate of 3.1 per cent — the so-called “neutral” rate,  suggesting they believe borrowing costs will need to remain modestly elevated well into the future to keep the economy in balance. 

The updated economic projections underscore the severity of the problem with the median projection for PCE inflation in 2026 jumping sharply to 3.6 per cent, up from the 2.7 per cent forecast made in March. Core PCE inflation — which strips out food and energy — was revised even more starkly upward, to a median of 3.3 per cent for this year compared with 2.7 per cent in the March outlook.

Fed is firmly in wait-and-see mode

For now, with inflation running well above target and a war in the Middle East adding uncertainty to the energy and supply-chain picture, the Fed is firmly in wait-and-see mode. The Committee described economic activity as expanding at a solid pace, even as it acknowledged elevated uncertainty stemming in part from the conflict in the Middle East. 

Productivity growth and capital investment were characterised as strong, and job gains have kept pace with the growth of the workforce, leaving the unemployment rate little changed. The inflation picture, however, has grown considerably more concerning since the Fed’s last round of projections in March.

The Committee said inflation remains elevated relative to its 2 per cent goal, partly reflecting supply shocks that have driven up prices in certain sectors, including energy, and vowed to deliver price stability. The Fed’s quarterly “dot plot,” which captures each official’s view of the appropriate path for interest rates, shifted noticeably hawkish compared to three months ago. 

The median projected federal funds rate for end-2026 rose to 3.8 per cent from 3.4 per cent in March, while the median for 2027 edged up to 3.6 per cent from 3.1 per cent. For 2028, the median projection moved to 3.4 per cent. The implication is clear: officials see fewer and later rate cuts than they did just a few months ago.

Modest growth outlook 

The growth outlook was also modestly trimmed, with the median projection for real GDP growth in 2026 pulled back to 2.2 per cent from 2.4 per cent in March, though officials still expect the economy to expand steadily through 2028 at around 2.2 to 2.3 per cent annually.

On the labour market, the median unemployment rate projection for 2026 ticked down slightly to 4.3 per cent from 4.4 per cent in the March forecast, a small but welcome shift suggesting the jobs market may be holding up better than previously feared.

Perhaps most striking for analysts is the near-unanimity among officials about the inflation risks. Of 18 participants who submitted projections, 17 judged the risks to PCE inflation as weighted to the upside, with only one viewing them as broadly balanced and none seeing them tilted to the downside. The same lopsided distribution held for core inflation, as that degree of consensus about the inflation threat is exceptional and suggests the Committee is far from entertaining rate cuts in the near term.