Will Americans be forced to pay higher interest rates in the next few months?
The Great Rate Debate keeps on truckin’.
A small majority of former Federal Reserve officials believe the U.S. central bank will need to raise short-term interest rates modestly later this year to contain sticky inflation plus energy shocks from the months-long Iran War.
That’s according to a new Duke University Department of Economicssurveyconducted ahead of the Fed’s June 16-17 policymaking meeting. Former Fed officials and staffers are granted anonymity in the survey, released June 15, to encourage participation and frank commentary.
“The real economy – especially the labor market – has proven unexpectedly resilient to the many domestic and global shocks of recent months,” one participant said. “Meanwhile, the inflation data continues to come in on the high side, and it’s not just energy prices. Both core and headline inflation have risen about 3% over the past 12 months. This shift should push them towards a bias towards tightening.”
That could change over the summer, as there are a number of factors that could cause the real economy to weaken substantially, the participant added.
The June Federal Open Market Committee meeting, Kevin Warsh’s first as Fed chair, will include the release of the Summary of Economic Projections (SEP), the Fed’s quarterly update of economic and interest-rate forecasts, also known as the “dot plot.”
And a larger majority – 22 – of those experts polled in the Duke survey said they expected the Fed to remove this forward-looking guidance from its June policy statement, leaving consumers and investors without an indication of which way it leans.
Warsh, who advocated for Fed reforms during his campaign to replace Jerome Powell as Chair, has signaled that the future of the “dot plot” and other forward-guidance communications could be impacted by his “regime change.”
“Warsh has said that he wants to provide less guidance, and I think the Committee will be okay with that in the current situation,” one survey participant said. “It will get more interesting when the Committee is leaning in a direction, and they have to decide if they show that somehow.”
Fed keeps rates steady thus far this year
The widely-watched CME Group FedWatch Tool estimates a near 100% probability that the FOMC will hold rates steady this month and a near 60% probability that it will raise rates in December.
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The FOMC continued to hold the benchmark Federal Funds Rate steady at 3.50% – 3.75% at its April 30 meeting, Powell’s last as Chair. He remains on the Board of Governors until April 2028.
Policymakers had cut rates by 25 basis points at their last three FOMC meetings of 2025 to shore up the softening labor market.
These “insurance” cuts stopped after the majority of policymakers decided the risk from higher prices was outweighing signs that the jobs market was stabilizing earlier this year.
The funds rate influences the cost of short-term borrowing from credit cards to student loans and also can impact mortgage rates.
Fed’s dual mandate requires a tricky balance
The Fed’s dual mandate from Congress requires maximum employment and stable prices.
- Lower interest rates support hiring but can fuel inflation. This risks fueling further inflation, potentially leading to an inflationary spiral.
- Higher rates cool prices but can weaken the job market. This increases the cost of borrowing and further stifles economic activity.
Historically, the U.S. central bank has favored stable jobs over higher prices.
Duke survey participants forecast Fed rate action
Seventeen of 32 former Fed officials and staff participating in the Duke survey said a rate increase would likely be appropriate in 2026, while 14 officials said no hike would be appropriate.
Only one person said the best course would be for the central bank to cut short-term interest rates, which the Fed has been signaling as its most likely course for several months.
The survey panel’s median estimate of inflation by year-end – as measured by the Personal Consumption Expenditure Price Index – was 3.5%.
That’s well above the Fed’s 2% target and near the three-year high of 3.8% in April from a year earlier.
Related: Morgan Stanley warns on Warsh’s Fed ahead of interest rate cut decision
Economic growth was expected to continue at a healthy rate above 2% while unemployment was projected to remain near the May level of 4.3% through the end of the year, modestly better than Fed officials expected a few months ago, according to the survey.
“In these circumstances, my expectation is that it will be necessary before long for the FOMC to move to a firmer stance of monetary policy to guard against an appreciable rise in inflation expectations and a resulting entrenchment of inflation at a higher level,’’ one participant said.
Fed rate bets vary across the board
The Duke survey was conducted between June 5-12. It comes after Fed watchers, economists, Wall Street analysts and politicians – especially the Trump administration – displayed a wide range of opinions regarding future interest-rate activities due to increasing risk to the inflation side of the mandate.
Truist Advisory Services Head of U.S. Economics Mike Skordeles told TheStreet in an email the wealth-management firm was “never in the ‘Rate hikes were necessary’ camp.’’
“Of course, we wouldn’t rule them out if inflation continued to spike, but we didn’t think they were warranted. We continue to think that risks remain balanced, which points toward the Fed holding rates steady for the next few meetings,’’ Skordeles said.
He said the firm expects a rate cut as the Fed’s next move.
“Unfortunately, given how long it will take for crude oil prices to work their way through supply chains, time is running out for a rate cut in 2026,” he added.
BOJ is latest central bank to hike rates
The Bank of Japan joined other major global central banks in raising interest rates June 16, citing price pressures from rising crude oil prices.
The bank said it would raise its benchmark interest rate 25 basis points to 1%, the highest level in 31 years.
The European Central Bank is expected to raise interest rates when it meets June 18 after eurozone inflation soared past 10% since the Iran War began.
Related: Warsh’s first Fed meeting resets interest rate-cut bets