Federal Reserve leaves rates unchanged; dot plot still signals lower rates in the cards for 2026
A relatively dovish reaction function from the US central bank.
The Federal Reserve held its policy rate unchanged at a range of 3.5% to 3.75%, as was universally expected.
The Summary of Economic Projections accompanying this release showed that the median monetary policymaker still expects the policy rate to be 25 basis points lower by the end of 2026 if the economy unfolds in line with their expectations.
The US central bank was very wrong-footed by the persistence of the inflation shock coming out of the pandemic, which was then turbocharged by the spike in oil and natural gas prices stemming from Russia’s invasion of Ukraine and subsequent restrictions on purchasing its energy.
Fed officials upped their forecast for growth this year and the next relative to December and raised their forecasts for inflation in 2026 — particularly headline inflation, which includes energy prices. Stronger growth and inflation would generally indicate a reduced need for rate cuts, but the median rate path through 2028 was unchanged from December.
The message from the central bank seems to be, “We’re not fighting the last war, and we’re praying for a short war.”
The SPDR S&P 500 ETF was little changed in the aftermath of the statement and updated forecasts, but extended losses to as much as 1.1% during Fed Chair Jerome Powell’s press conference.
Fed Governor Stephen Miran was the lone official to dissent, favoring lower rates.
Prediction markets thought the most likely outcome was that two US monetary policymakers would dissent at this meeting, with roughly 30% odds of just one dissent and about a 5% probability of three dissents.
(Event contracts are offered through Robinhood Derivatives, LLC — probabilities referenced or sourced from KalshiEx LLC or ForecastEx LLC.)
The war in Iran and resulting disruption to global energy markets, with US gas prices registering their sharpest increase in more than two decades, has caused traders to tear up the playbook for any easing from the US central bank this year.
Before the strikes, a full interest rate cut was priced into federal funds futures by the July meeting. Heading into this decision, a full cut is not priced in for all of 2026.
In the run-up to this release, prediction markets ascribed roughly 5% odds to a cut at the Fed’s meeting next month, and about one in three odds to the prospect of a reduction in June.
This is the US central bank’s first meeting since President Donald Trump said that former Fed Governor Kevin Warsh would be his pick to succeed Powell as chair of the Federal Reserve.
