Could the Fed Raise Interest Rates In 2026?

Key Takeaways

• Details from the minutes of the Fed’s most recent meeting suggest some officials are focused on raising interest rates.
• That’s a major change from a few months ago, when a series of cuts looked like a given in 2026.
• Analysts say that for now, economic conditions don’t warrant rate hikes and the Fed will likely remain on pause in the coming months.

The Federal Reserve is at a crossroads. Evolving economic conditions mean interest rate cuts—once deemed a certainty—may not be such a sure bet this year. Minutes from the Fed’s late January meeting shed fresh light on how Federal Open Market Committee members are navigating that change. The shift comes as the tariff landscape continues to evolve, a new Fed chair is set to take the reins this spring, and divisions remain pronounced among the voting members of the FOMC.

After months of focusing on a cooling job market and the easier policy required to support it, it appears some at the Fed are turning their attention to inflation, which is running at 2.9%, well above their 2.0% target. In crafting their recent decision to hold rates steady, “several participants indicated that they would have supported a two-sided description of the Committee’s future interest rate decisions,” read the minutes from the Fed’s January meeting. That two-sided description would reflect “the possibility that upward adjustments to the target range for the federal funds rate could be appropriate if inflation remains at above-target levels.”

Those existing inflation concerns among Fed officials could be magnified by the spike in oil prices as the war with Iran spread across a major oil-supply region.

On Wall Street, the recap was quickly branded as a sign of a “hawkish tilt”—a shift from a bias toward lowering rates and easing policy to one that may favor more restrictive conditions. The statement also sparked attention because it appeared to put some on the committee further at odds with President Donald Trump, who has spent years criticizing the central bank and current chair Jerome Powell for not lowering rates quicker. Trump’s pick to succeed Powell when his term expires in May, Kevin Warsh, has also expressed a preference for lower rates.

Rate Hikes Still Look Unlikely

Analysts caution against reading too much into the statement. “A rate hike this year seems very unlikely,” says Bernard Yaros, lead US economist at Oxford Economics.

In remarks to reporters following the January meeting, Powell echoed that sentiment. He acknowledged that while the FOMC will remain responsive to incoming economic data, the Fed likely won’t pivot to a more restrictive stance anytime soon. “It isn’t anybody’s base case that the next move will be a rate hike,” he said.

Don Rissmiller, chief economist at Strategas, says that with interest rates in neutral territory—a range that is neither accommodative nor restrictive for the economy—a two-sided policy would be warranted. “I have a feeling that’s where the discussion [in the minutes] was coming from,” he says. “If we’re [close to] neutral, shouldn’t we have a truly neutral outlook?” He characterizes the statements as a more “theoretical” exercise, rather than a statement of intent, especially given Powell’s comments.

Oxford Economics’ Yaros boils it down to optics, saying Fed officials “want to quash any idea out there of an unspoken [inflation] target higher than 2%,” especially after months of a bias toward propping up the labor market.

What’s the Fed’s Next Move?

Most Fed watchers anticipate a pause for the duration of Powell’s term and beyond. The Fed has reduced its benchmark interest rate by 0.75 percentage points since last fall and by 1.75 points since its cutting cycle began in 2024. Since then, inflation has come down dramatically from its 2022 highs, and the labor market has stabilized after showing signs of deterioration last summer. The target federal-funds rate is now in a range of 3.50%-3.75%.

“The economic conditions don’t warrant [a cut],” says Dan Siluk, head of global short duration and liquidity at Janus Henderson Investors. “Growth remains strong. Unemployment is not trending higher.” That’s despite the growing tension between the White House and the central bank. “You’ve got this competing force where the administration wants to run the economy hot [with fiscal stimulus measures], but at the same time, they’re going to put pressure on the new Fed chair to cut rates.”

Against that backdrop, “holding off and doing nothing for the next few meetings could happen,” says Rissmiller of Strategas. He points to the vocal contingent of the FOMC that remains concerned about rising unemployment.

Janus Henderson’s Siluk doesn’t see a hike in the cards either. He says a cut could be more likely if Warsh reduces the Fed’s balance sheet, though it could take months for him to convince the FOMC of his view. Warsh has previously argued that shrinking the balance sheet would make it easier to maintain lower rates.

Yaros of Oxford Economics expects two more cuts this year, in June and September. “That’s when they’re going to see enough progress on the inflation front that they should feel comfortable,” he says. He sees plenty of further disinflation in the cards, thanks in large part to housing inflation, which he expects to decelerate through 2026, and the fact that the majority of tariffs may have already been passed through to consumers. “All the pieces of the puzzle seem to point toward less inflation going forward,” he says. “I don’t see any of this leading to an uptick in inflation that would then cause a rate hike.”

The next move priced into bond futures markets is a 25-point cut in July, according to data from the CME FedWatch Tool.

Could the Rate Outlook Change?

BMO economists characterized the shift laid out in the January meeting minutes as “a telling reminder that the monetary winds could still swiftly change direction.”

Rissmiller says a scenario wherein productivity slows and the economy is still running hot thanks to fiscal stimulus could put upward pressure on inflation, which could trigger a scenario in which a rate hike becomes necessary. He points to recent rate hikes in Australia as an example.

Siluk of Janus Henderson says he’s surprised that markets haven’t yet priced out some of the cuts investors expect in the months ahead. He attributes the outlook for some cuts to the upcoming handoff from Powell to Warsh. “That doesn’t necessarily mean there are a series of hikes priced in, but [the market has] retained these cuts because Warsh is coming along, and the makeup of balance sheet and rates may change a little,” he explains.