Will the Federal Reserve cut interest rates in 2026?

• The Fed raised its PCE inflation forecast to 2.7% for year-end 2026 (up from 2.4% in December), well above the 2% target, while core PCE was also revised up to 2.7% from 2.5%
• Chair Jerome Powell stated any rate cut is conditional on seeing progress on inflation, particularly expecting tariff-related inflation to decline in mid-2026 after an initial spike
• Market pricing has reversed sharply: probability of rates remaining unchanged through June jumped from 37.8% last month to 89.2% currently, with markets now seeing a 3.8% chance of a rate hike

Federal Reserve Interest Rate Outlook Summary

Key Policy Decision

The Federal Reserve held interest rates unchanged at 3.5%-3.75% on Wednesday, marking the second consecutive meeting with no change following three 25-basis-point cuts in September, October, and December 2025. The FOMC voted 11-1 to maintain current rates.

Economic Projections

The Fed's Summary of Economic Projections (SEP) indicates:

• Median projection: One 25-basis-point cut in 2026, one cut in 2027
• Federal funds rate: 3.4% by end of 2026, 3.1% by end of 2027 (unchanged from December projections)
• PCE inflation: 2.7% by year-end 2026 (up from 2.4% December projection)
• Core PCE: 2.7% (up from 2.5%), well above the Fed's 2% target

Fed Chair Powell's Comments

Jerome Powell emphasized that rate projections are conditional on economic performance and not a committee commitment. He noted that 4-5 policymakers shifted from expecting two cuts to one cut. Powell stated any rate reduction depends on progress taming inflation, expecting improvement mid-year as tariff effects moderate.

Market Reaction

Following the announcement, market expectations shifted significantly:

• June rate hold probability: 89.2% (up from 79.5% yesterday, 37.8% last month)
• 3.8% chance of a June rate hike emerged (from zero)
• December unchanged rate probability: 51.3% (up from 4.9% last month)
• Probability of two cuts by December: dropped to 9.5% from 32.5%

Key Risk Factor

Mounting uncertainty over Iran war impacts on the economy remains a significant consideration for monetary policy decisions.