That was not the outcome on June 17, when the Federal Open Market Committee (FOMC) held its first meeting under Federal Reserve Chair Kevin Warsh. He had emerged as President Donald Trump’s preferred choice to replace Jerome Powell, amid repeated criticism from Trump that rates were not being cut quickly enough. However, the FOMC left policy unchanged, keeping rates at a range of 3.50%-3.75%.
Most market watchers were anticipating further rate cuts in their 2026 forecasts. In December 2025, the Federal Reserve reduced rates by 25 basis points to a range of 3.50%-3.75%. Capital Group said in its 2026 market outlook that it expected rates to fall to 3%, arguing that a “dovish Fed is likely to continue with rate cuts responding to labour market weakness.”
Expectations have shifted sharply, with earlier forecasts upended in the first half of the year by geopolitical developments. What was initially expected to be a swift resolution of the tensions between the US, Israel and Iran has instead developed into a prolonged conflict in the Middle East. Disruptions around the Strait of Hormuz — a key conduit for roughly 20% of global oil and gas flows — have contributed to higher energy prices and renewed inflationary pressure. As a result, market watchers have moved from pricing in rate cuts to considering the possibility of rate hikes.
