Updated June 17, 2026 at 12:34 PM MDT
Sign up for the Planet Money newsletter. The world is confusing. Economics can help.
With inflation at its highest level in more than three years, the Federal Reserve held its benchmark interest rate steady Wednesday, and signaled its next move could be a rate increase. It was the first rate decision under the leadership of the new Fed chairman, Kevin Warsh.
President Trump nominated Warsh to lead the central bank in hopes he would push for lower interest rates. But a wartime spike in energy prices has pushed rate cuts off the table for now.
Updated forecasts from individual members of the rate-setting committee suggested they expect to raise interest rates by a quarter percentage point this year. That's a turnaround from three months ago, when the average committee member was projecting a quarter-point cut in 2026.
Warsh did not offer his own forecast of where interest rates are going. The new Fed chairman has generally been skeptical of such "forward guidance," fearing that it ties the central bank's hands, even though officials regularly caution that forecasts are just a best guess, not a roadmap for future action.
Consumer prices overall were up 4.2% in May from a year ago. That's the biggest annual increase since April 2023.
A statement issued at the conclusion of Wednesday's meeting hinted that the policymakers are concerned about rising prices.
"Inflation remains elevated relative to the Committee's 2% goal, in part reflecting supply shocks that have driven price increases in certain sectors, including energy," the statement said. "The Committee will deliver price stability."
Investors are also betting that interest rates will end the year higher than they are now.
Gas prices complicate economic outlook
The U.S. war with Iran has snarled tanker traffic in the Strait of Hormuz — a vital shipping lane for crude oil — triggering a sharp jump in gasoline prices. Although gas prices have inched down in recent days in hopes of a diplomatic resolution, AAA says the average price of regular gas in the U.S. is still more than a dollar a gallon higher than it was before the war.
While fighting inflation is one of the main jobs of the Federal Reserve, its primary tool is ill-suited to addressing supply shocks. The Fed typically tries to curb inflation by raising interest rates, but that would do little to ease the strain on global energy supplies.
Fortunately, the price hikes haven't yet spread widely to other goods and services besides energy. "Core" inflation, which strips out volatile energy and food prices was a more modest 2.9% in May.
Signs of improvement in the job market also weaken the argument that lower interest rates are needed. After anemic hiring in 2025, U.S. employers have added an average of 188,000 jobs in each of the last three months.
In an unusual move, Warsh's predecessor, Jerome Powell, has elected to remain on the Fed's governing board for a period of time, after his term as chairman expired last month. Powell has promised to keep a low profile and not compete with the new chairman. But his presence is designed to serve as a kind of firewall against undue pressure from the White House to lower interest rates.
Copyright 2026 NPR
