With inflation high and the election approaching, the Federal Reserve's decision on interest rate hikes is caught in a game of strategy.
2026-06-26 21:45:04
Current inflationary pressures in the United States continue to rise, with core inflation reaching a near three-year high, making the Federal Reserve's interest rate policy highly uncertain. At this crucial juncture with the midterm elections approaching, interest rate adjustments not only affect the trajectory of the US economy but also directly impact the economic campaign narratives of the Trump administration and the Republican Party, becoming a core focus of the current macroeconomic and political maneuvering in the United States.
Key data released by the U.S. Commerce Department on Thursday showed that the annualized increase in the personal consumption expenditures (PCE) inflation gauge, which is most closely watched by the Federal Reserve, reached 4.1%, far exceeding the central bank's normalized policy target of 2%.
Even excluding food and energy categories with large fluctuations, the core PCE index growth rate still hit a three-year high. The overall rising price level continues to erode the real purchasing power of American residents, further exacerbating public dissatisfaction with the high cost of living.
The rapid reversal of the economic situation has completely overturned previous market expectations.
Six months ago, the US labor market was weak, with sluggish growth in non-farm payrolls and a slight increase in the unemployment rate. In the post-pandemic era, the stubborn inflation in the housing market gradually subsided, and the negative impact of tariff policies was less than expected, resulting in a moderate cooling trend in the US economy as a whole.
At that time, the Federal Reserve predicted that it would only cut interest rates by 25 basis points in 2026 and that inflation would fall back to the policy target range by the end of the year. The Trump administration was also convinced that the new Federal Reserve Chairman would implement interest rate cuts in a timely manner to create a relaxed economic and financial environment for the midterm elections.
However, the continued escalation of the geopolitical conflict in Iran has completely reversed the economic trend.
The continued delay in the resumption of navigation in the Strait of Hormuz has driven up energy prices sharply, leading to a general increase in food prices, a significant decline in consumer confidence, and a comprehensive rise in inflationary pressures.
With the shift in market logic, Wall Street pricing indicates that the probability of the new Federal Reserve Chairman Kevin Warsh starting an interest rate hike as early as September this year has risen to 64%. Once implemented, financing costs for residents and businesses will rise across the board, continuously tightening the overall financial environment on the eve of the election, directly and severely damaging the Republican Party's campaign platform centered on affordability.
The Trump administration has consistently prioritized lowering borrowing costs across society as its core economic and political objective. It has not only repeatedly criticized former Federal Reserve Chairman Jerome Powell's interest rate policies but also implemented various policies to reduce mortgage and credit card interest rates, making low-cost financing and price stability key tools for winning over voters.
The White House offered a different interpretation of the current inflation surge. A spokesperson stated that the rise in inflation was due to short-term disruptions in the energy market caused by the conflict with Iran, rather than a systemic inflation spiral out of control. With the implementation of the US-Iran memorandum of understanding and the easing of geopolitical tensions, oil and gas prices have fallen significantly, and the overall inflation level will subsequently decline in tandem.
However, the market and institutions generally do not agree with the White House's optimistic predictions.
The prevailing view in the industry is that the pace of inflation decline is insufficient to meet the Trump administration's demands for significant interest rate cuts, and the Federal Reserve's policy focus has shifted entirely to stabilizing prices.
At his first press conference after taking office, Warsh clearly stated that he would adhere to the goal of price stability, and most Federal Reserve policymakers tend to prevent a second wave of inflation by raising interest rates.
At the same time, the AI investment boom has driven up prices for both physical goods and consumer goods, while companies like Apple have raised prices due to increased chip demand. In addition, the expansion of the supply of US Treasury bonds has pushed up long-term yields. These multiple factors have combined to solidify the foundation for rising interest rates.
Institutional predictions regarding the Federal Reserve's monetary policy have diverged.
Bank of America Securities economist Stephen Juno's team predicts that the Federal Reserve will raise interest rates by a total of 75 basis points this year, and emphasizes that if inflation continues to remain above the 3% to 3.3% range, the probability of further rate hikes will increase.
It points out that the Federal Reserve no longer tolerates inflationary pressures from supply-side shocks, and its policy response has undergone a fundamental shift.
However, some Wall Street analysts are taking a wait-and-see approach, believing that the Federal Reserve may keep interest rates unchanged for the time being.
David Kelly, chief strategist at JPMorgan Asset Management, offered a different perspective, arguing that the current rise in US inflation was not caused by monetary factors, but rather by non-monetary measures introduced by Washington, such as the geopolitical conflict with Iran, immigration controls, and tariff policies.
Such supply-side shocks are beyond the scope of monetary policy. Hasty interest rate hikes will only exacerbate financial market volatility and cause economic instability, failing to address the root cause of inflation and offering no benefit to the real economy. Only when external shocks subside will inflation naturally decline.
It is worth noting that market sentiment has shown signs of a marginal reversal.
Following the release of inflation data, the yield on two-year US Treasury bonds fell sharply, and various inflation expectation indicators gradually cooled down. This echoed the view of Williams, a permanent voting member of the FOMC and president of the New York Federal Reserve, that there was no need to raise interest rates at present.
Market analysts point out that the Federal Reserve's previous economic forecasts did not take into account the latest developments in the Iran nuclear peace process and the decline in energy prices, making the forecasts outdated.
With shipping in the Strait of Hormuz gradually resuming and energy prices continuing to decline, the current rising expectations for interest rate hikes are expected to cool down quickly.
Industry experts analyze that monetary policy has a significant transmission lag, and the impact of interest rate hikes on the macroeconomy will be apparent with a lag of about one year.
Looking at the economic fundamentals in the second half of next year, there are currently no sustainable drivers to support inflation significantly exceeding the Fed's target for an extended period. This also means that the current intense struggle between inflation and interest rates will likely ease gradually as the external environment improves.
Core inflation data significantly exceeded the target, and residents' purchasing power continued to shrink.
Key data released by the U.S. Commerce Department on Thursday showed that the annualized increase in the personal consumption expenditures (PCE) inflation gauge, which is most closely watched by the Federal Reserve, reached 4.1%, far exceeding the central bank's normalized policy target of 2%.
Even excluding food and energy categories with large fluctuations, the core PCE index growth rate still hit a three-year high. The overall rising price level continues to erode the real purchasing power of American residents, further exacerbating public dissatisfaction with the high cost of living.
Economic expectations have reversed dramatically, and the initial predictions of easing have completely failed to materialize.
The rapid reversal of the economic situation has completely overturned previous market expectations.
Six months ago, the US labor market was weak, with sluggish growth in non-farm payrolls and a slight increase in the unemployment rate. In the post-pandemic era, the stubborn inflation in the housing market gradually subsided, and the negative impact of tariff policies was less than expected, resulting in a moderate cooling trend in the US economy as a whole.
At that time, the Federal Reserve predicted that it would only cut interest rates by 25 basis points in 2026 and that inflation would fall back to the policy target range by the end of the year. The Trump administration was also convinced that the new Federal Reserve Chairman would implement interest rate cuts in a timely manner to create a relaxed economic and financial environment for the midterm elections.
Geopolitical conflicts trigger inflation, and market expectations for interest rate hikes rise sharply.
However, the continued escalation of the geopolitical conflict in Iran has completely reversed the economic trend.
The continued delay in the resumption of navigation in the Strait of Hormuz has driven up energy prices sharply, leading to a general increase in food prices, a significant decline in consumer confidence, and a comprehensive rise in inflationary pressures.
With the shift in market logic, Wall Street pricing indicates that the probability of the new Federal Reserve Chairman Kevin Warsh starting an interest rate hike as early as September this year has risen to 64%. Once implemented, financing costs for residents and businesses will rise across the board, continuously tightening the overall financial environment on the eve of the election, directly and severely damaging the Republican Party's campaign platform centered on affordability.
The White House interprets inflation as overly optimistic, hoping that geopolitical easing will cool prices.
The Trump administration has consistently prioritized lowering borrowing costs across society as its core economic and political objective. It has not only repeatedly criticized former Federal Reserve Chairman Jerome Powell's interest rate policies but also implemented various policies to reduce mortgage and credit card interest rates, making low-cost financing and price stability key tools for winning over voters.
The White House offered a different interpretation of the current inflation surge. A spokesperson stated that the rise in inflation was due to short-term disruptions in the energy market caused by the conflict with Iran, rather than a systemic inflation spiral out of control. With the implementation of the US-Iran memorandum of understanding and the easing of geopolitical tensions, oil and gas prices have fallen significantly, and the overall inflation level will subsequently decline in tandem.
Multiple positive factors support inflation, and the Federal Reserve's willingness to raise interest rates continues to strengthen.
However, the market and institutions generally do not agree with the White House's optimistic predictions.
The prevailing view in the industry is that the pace of inflation decline is insufficient to meet the Trump administration's demands for significant interest rate cuts, and the Federal Reserve's policy focus has shifted entirely to stabilizing prices.
At his first press conference after taking office, Warsh clearly stated that he would adhere to the goal of price stability, and most Federal Reserve policymakers tend to prevent a second wave of inflation by raising interest rates.
At the same time, the AI investment boom has driven up prices for both physical goods and consumer goods, while companies like Apple have raised prices due to increased chip demand. In addition, the expansion of the supply of US Treasury bonds has pushed up long-term yields. These multiple factors have combined to solidify the foundation for rising interest rates.
Extreme predictions emerge from various institutions, intensifying the debate over the pace of interest rate hikes.
Institutional predictions regarding the Federal Reserve's monetary policy have diverged.
Bank of America Securities economist Stephen Juno's team predicts that the Federal Reserve will raise interest rates by a total of 75 basis points this year, and emphasizes that if inflation continues to remain above the 3% to 3.3% range, the probability of further rate hikes will increase.
It points out that the Federal Reserve no longer tolerates inflationary pressures from supply-side shocks, and its policy response has undergone a fundamental shift.
However, some Wall Street analysts are taking a wait-and-see approach, believing that the Federal Reserve may keep interest rates unchanged for the time being.
Alternative Market View: This round of inflation is not driven by monetary factors; raising interest rates does more harm than good.
David Kelly, chief strategist at JPMorgan Asset Management, offered a different perspective, arguing that the current rise in US inflation was not caused by monetary factors, but rather by non-monetary measures introduced by Washington, such as the geopolitical conflict with Iran, immigration controls, and tariff policies.
Such supply-side shocks are beyond the scope of monetary policy. Hasty interest rate hikes will only exacerbate financial market volatility and cause economic instability, failing to address the root cause of inflation and offering no benefit to the real economy. Only when external shocks subside will inflation naturally decline.
Actual market movements indicate a marginal recovery in market sentiment and signs of easing expectations for interest rate hikes.
It is worth noting that market sentiment has shown signs of a marginal reversal.
Following the release of inflation data, the yield on two-year US Treasury bonds fell sharply, and various inflation expectation indicators gradually cooled down. This echoed the view of Williams, a permanent voting member of the FOMC and president of the New York Federal Reserve, that there was no need to raise interest rates at present.
Market analysts point out that the Federal Reserve's previous economic forecasts did not take into account the latest developments in the Iran nuclear peace process and the decline in energy prices, making the forecasts outdated.
With shipping in the Strait of Hormuz gradually resuming and energy prices continuing to decline, the current rising expectations for interest rate hikes are expected to cool down quickly.
Industry experts analyze that monetary policy has a significant transmission lag, and the impact of interest rate hikes on the macroeconomy will be apparent with a lag of about one year.
Looking at the economic fundamentals in the second half of next year, there are currently no sustainable drivers to support inflation significantly exceeding the Fed's target for an extended period. This also means that the current intense struggle between inflation and interest rates will likely ease gradually as the external environment improves.
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