The 2026 annual Jackson Hole meeting has delivered a clear warning to financial markets: U.S. interest rates may not be heading lower… just yet.
Federal Reserve Chair Kevin Warsh used his first major Jackson Hole speech to stress that inflation remains too high and that recent improvements have not been enough to convince policymakers that price pressures are returning sustainably towards the Fed’s 2% target.
Warsh also suggested that current financial conditions are not sufficiently restrictive, raising the possibility that further interest-rate increases could be required.
Interest rate increase more likely?
Markets reacted quickly, with the probability of a September 2026 rate rise climbing to around 60%, compared with roughly 35% before his speech.
The message is particularly significant because investors had been hoping for lower borrowing costs. Instead, attention has shifted towards whether stubborn U.S. inflation will force the Fed to tighten policy again.
With the September 2026 meeting approaching, upcoming inflation and employment figures could prove crucial in determining the next move.
The Federal Reserve maintained its key interest rate on Wednesday 29th January 2025, reversing a recent trend of policy easing as it assesses the likely turbulent political and economic landscape ahead.
The decision followed three consecutive cuts since 2024 and marked the first Federal Reserve meeting since frequent Fed critic Donald Trump assumed the presidency last week. He almost immediately expressed his intention for the central bank to cut rates.
The post-meeting statement scattered a few clues about the reasoning behind the decision to hold rates steady. It offered a more optimistic view on the U.S. labour market while losing a key and telling reference from the December 2024 statement that inflation ‘has made progress toward’ the Fed’s 2% inflation goal.
Statement
Text appearing for the first time in the new statement is in red and underlined. Black text appears in both statements.
Text appearing for the first time in the new statement is in red and underlined. Black text appears in both statements.
The decision comes against a volatile political backdrop.
In just over a week, Trump has disrupted Washington’s policy and norms by signing hundreds of orders aimed at implementing an aggressive agenda.
The U.S. president has endorsed tariffs instruments of economic and foreign policy, authorised a wave of deportations for those crossing the border illegally, and a series of deregulatory initiatives.
Trump spoke of his confidence that he will bring down inflation and said he would ‘demand’ that interest rate be lowered ‘immediately.’
Although the president lacks authority over Fed beyond nominating board members, Trump’s statement indicated a potentially contentious relationship with policymakers, similar to his first term.
Inflation has moved down sharply from the 40-year peak it hit in mid-2022, but the Fed’s 2% goal has remained elusive.
In fact, the central bank’s preferred pricing gauge showed headline inflation ticked higher to 2.4% in November, the highest since July, while the core measure excluding food and energy held at 2.8%.
The Federal Open Market Committee (FOMC) has voted to reduce the interest rate by 0.50% after having maintained its benchmark rate within the range of 5.25% to 5.50% since July 2023
The previous rate was the highest seen for 23 years and remained unchanged even though the Fed’s favoured inflation gauge has decreased from 3.3% to 2.5%, and the unemployment rate has climbed from 3.5% to 4.2% during this period.
Following the interest rate cut today, 18th September 2024 of 0.50%, the new rate now stands at 4.75% to 5.0%.
Federal Reserve Chair Jerome Powell ended a press conference in which he gave markets exactly what they wanted; a strong indication of a September 2024 rate cut.
Powell says September 2024 rate cut ‘on the table’ if inflation continues to cool.
Federal Reserve officials held short-term interest rates steady but observed that inflation is getting closer to its 2% target.
The FOMC did not signal an immediate rate cut; they reiterated that further progress is necessary before considering rate reductions. However, Federal Reserve Chair Powell’s subsequent statement was markedly dovish, hinting at a potential rate cut in September 2024.
Markets were generally happy with the news after moving up all day in anticipation of the confirmation of a September cut. The Dow Jones, Nasdaq, Russell 2000 and S&P 500 all climbed before and after the news.
Jerome Powell on Tuesday 9th July 2024 reportedly expressed concern that holding interest rates too high for too long could jeopardize economic growth. This comment came ahead of the consumer price index reading due this week.
Preparing for a two-day session on Capitol Hill, the central bank chief stated that the economy and labour market continue to be robust, even with some recent slowdown. Powell noted a slight reduction in inflation, affirming that policymakers are determined to reduce it to their target of 2%.
“At the same time, in light of the progress made both in lowering inflation and in cooling the labour market over the past two years, elevated inflation is not the only risk we face,” he reportedly said. “Reducing policy restraint too late or too little could unduly weaken economic activity and employment.”
Sounds to me like he is paving the way for the first interest rate reduction.
The comment ties-in with the upcoming one-year period since the Federal Open Market Committee (FOMC) last increased the benchmark interest rates.
The Federal Open Market Committee (FOMC) held interest rates steady and indicated a willingness stop raising interest rates.
But a cut anytime soon is unlikely until inflation is brought fully under control and nearer to the Fed’s 2% inflation target.
The Federal Reserve sent a signal that it is finished with raising interest rates but made it clear that it is not ready to start cutting, just yet. It also said there are no plans yet to cut rates with inflation still running above the central bank’s target.
Federal Reserve interest targets and increases since 2022 to January 2024
Federal Reserve officials in December concluded that interest rate cuts are likely in 2024, though they appeared to provide little in the way of when that might occur, according to minutes from the meeting released Wednesday 3rd January 2024.
FOMC meeting minutes
The rate-setting Federal Open Market Committee (FOMC) agreed to keep its rate steady in a range between 5.25% and 5.5%. Members indicated they expect 0.75% cut by the end of 2024.
Uncertainty
However, the meeting summary noted a high level of uncertainty over how, or even if, that will happen. Markets have reacted negatively to this news.
The minutes noted an unusually elevated degree of uncertainty about the policy path. Several members said it might be necessary to keep the funds rate at an elevated level if inflation doesn’t cooperate, and others noted the potential for additional increases.
But, despite this cautionary tone from Fed officials, markets expect the central bank to cut rates in 2024.
Dot plot
The dot plot of individual members’ indications released following the meeting showed that members expect cuts over the coming three years. This will bring borrow back to the 2% desired target.
The minutes indicated that clear progress had been made against inflation, with a six-month measure of personal consumption expenditures even indicating that the inflation rate has edged below the Fed’s 2% target.
FOMC Dot plot projections through 2026
However, the document also noted that progress has been uneven across sectors, with energy and core goods moving lower but core services still moving higher.
The Dot plot – what is it?
The dot plot, in relation to the FED or FOMC, is a chart that shows the projections of the Federal Reserve Board members and Federal Reserve Bank presidents for the federal funds rate, which is the interest rate that U.S. banks charge each other for overnight loans.
The dot plot is updated four times a year, after each FOMC meeting, and reflects the individual views of the policymakers on the appropriate level of the federal funds rate for the current year, the next few years, and the longer run.
The graph (dot plot) can help markets and the general public understand the Fed’s monetary policy stance and expectations for the future path of interest rates.
However, the dot plot is not a policy commitment or a forecast, but rather a snapshot of the opinions of the FOMC participants at a given point in time. The dot plot can change over time as new information and economic conditions develop.
