The Fed Paused Rate Hikes, Here Is Why That Decision Could Look Very Different Six Months From Now

The Federal Reserve ended a cutting cycle that had resulted in six reductions since September 2024 on January 28, 2026, by keeping its benchmark interest rate at 3.50% to 3.75%. The decision was widely anticipated, characterized as prudent, and bolstered by new data indicating a labor market that seemed to be stabilizing following a challenging year.

Standing at the well-known podium in the Eccles Building in Washington, Jerome Powell used the expression “wait and see,” which central bankers use when they truly don’t know what will happen next and would prefer that the markets remain unaware of it. The pause appeared to be the responsible course of action at the time. That description seems more and more brittle in light of what has transpired since.

Federal Reserve Rate Policy — Key Data 2026

The issue is that the Fed’s January models did not account for the changes that occurred in the world between January and April 2026. Before a shaky ceasefire started to take hold, the U.S.-Israeli war with Iran caused oil prices to rise more than 50%, disrupted international shipping through the Strait of Hormuz, and introduced precisely the kind of supply-side inflation shock that monetary policy is ill-equipped to handle. The price of crude oil is still around $97 per barrel, despite a sharp decline following news of a ceasefire. Gas prices, airline fares, and the cost of goods that must be shipped are just a few of the ways that this increased cost permeates the economy and manifests itself in inflation readings 60 to 90 days later.

The meeting’s official statement had not disclosed what the Fed’s March minutes, which were made public on April 8, did: “many participants” now think rate hikes might be required if inflation keeps rising above the 2% target. Compared to January, when only “several” officials were prepared to even consider that possibility, that represents a significant change.

Prior to this pause, the inflation picture was already unsettling. The Fed’s preferred inflation indicator, the personal consumption expenditures price index, increased by an estimated 2.8% during the 12 months that ended in February 2026, while core PCE was at 3.0%. These figures represent the continuation of a five-year period in which inflation has consistently exceeded the Fed’s target; they are not emergency figures.

Speaking at the University of Detroit Mercy in early April, Fed Vice Chair Philip Jefferson made it clear that while inflation has decreased from its pandemic peak, progress has stagnated. Prices for core goods have increased. For the majority of the last year, core services—aside from housing—have moved sideways. Increases in other areas have largely offset the welcome drop in housing services inflation. The Fed’s disinflationary narrative from late 2024, which claimed that more cuts were warranted and progress was being made, is now more difficult to convey with the same assurance.

As this develops, it seems as though the Fed is torn between two mandates that are simultaneously being pulled in different directions. Regarding inflation, the case for holding or even tightening is supported by oil prices, tariff effects, and ongoing core price pressures. Regarding employment, the average monthly job growth in Q1 2026 was about 70,000, which is low by historical standards. However, this can be partially attributed to the current administration’s sharp drop in immigration, which lowered the breakeven point.

After peaking at 4.5%, the unemployment rate has decreased to 4.3%, which is near the natural rate as estimated by many economists. However, according to the March minutes, “most participants” still think that a protracted conflict in the Middle East would eventually weaken the labor market sufficiently to justify additional cuts. During the press conference, Chair Powell refrained from using the term “stagflation” in public. It’s a signal in and of itself because it had to be avoided at all.

The impending change in leadership adds to the complexity. On January 30, President Trump nominated Kevin Warsh to succeed Powell when Powell’s term ends in May 2026. As a Fed governor for many years, Warsh was well-known for his inclination to keep interest rates higher for longer, especially during the post-financial crisis era. According to Michael Feroli, chief U.S. economist at J.P. Morgan, more recent remarks have indicated a slightly more accommodative lean, which he attributes to alignment with the administration’s preferences.

Feroli’s frank assessment is worth quoting directly: Warsh’s effectiveness will depend on his ability to foster consensus among 19 committee members who hold widely divergent views, and his true leanings are uncertain and may change over time. The committee must approve fundamental changes to Fed communications, such as the dot plot, rather than the chair acting alone. The institution is more resilient than any one person in charge of it.

According to J.P. Morgan’s current prediction, the Fed will pause for the entirety of 2026 before raising rates by 25 basis points in the third quarter of 2027, returning the upper bound to 4%. According to Feroli, “rates are restrictive looks increasingly untenable,” which is a view that the current rate level, which was previously thought to be restrictive, increasingly appears neutral given the state of the economy.

It’s still unclear if the conflict will resume and push the Fed in a direction it would obviously prefer to avoid, or if the ceasefire will last long enough to significantly lower oil prices and reduce inflation pressure. When everything appeared to be under control in January, the decision to pause was the right one. Oil, inflation, and two weeks of diplomacy—which could fall apart before anyone notices—will determine whether things still appear that way by August.