The Federal Reserve is reportedly shifting its internal debate from ‘when to cut rates’ to ‘under what conditions to raise rates’, according to a report by The Wall Street Journal. This marks a significant pivot in U.S. monetary policy expectations, driven by rising energy prices, geopolitical tensions in the Middle East, and persistent inflation.
At the Fed’s last policy meeting, three regional presidents explicitly dissented from the view that the next rate move would be a cut. Dallas Fed President Lorie Logan stated that the direction is uncertain, adding, “the next step could be both a rate increase and a rate cut.”
Chairman Jerome Powell, nearing the end of his term, acknowledged the Fed is moving from a ‘dovish’ to a ‘neutral’ stance, noting that communication would become fully neutral before any potential rate hikes. Powell also highlighted that inflation remains high, with energy prices creating upward pressure in the short term.
Meanwhile, Barclays revised its interest rate forecast, withdrawing its previous expectation of a September cut and now projecting rates to remain stable through 2026. Morgan Stanley also expects no cuts throughout the year. Minneapolis Fed President Neel Kashkari warned that the ongoing U.S.-Iran conflict could necessitate rate hikes, stating, “the longer the war lasts, the more intense the inflationary pressures will become.”
The shift has dampened market expectations for rate cuts in 2026, with the Fed increasingly focused on inflation risks tied to global supply chain disruptions and energy price volatility.
