WASHINGTON — The Federal Reserve kept its key rate unchanged Wednesday yet almost half the central bank’s policymakers said they could support a rate hike later this year, an unexpectedly aggressive outcome that would disappoint President Trump and suggests heightened concerns about persistent inflation.
In an unusually short statement after their two-day meeting, Fed officials dropped language that had suggested their next move would be to cut their key rate. The brief statement likely reflects the influence of new chair Kevin Warsh, appointed by Trump, who has previously criticized the Fed for commenting too broadly on the economy.
In a set of quarterly projections, nine Fed officials said they expected at least one rate hike this year, with six supporting two or more. It’s a sharp change from March, when no policymakers penciled in a hike and the committee as a whole forecast one cut in 2026. The change is an acknowledgement that inflation is at its highest level in three years and many officials have said in recent speeches that if inflation doesn’t decline, higher rates may be necessary as early as the end of the year.
All told, another eight officials signaled they would support keeping the rate unchanged, and one penciled in a cut.
In another sign of how Warsh may change the way the Fed operates: He appears to not have submitted a forecast for how the Fed might change its key rate. A chart illustrating the projections showed just 18 dots, even though there are 19 policymakers. He has previously criticized the projections for potentially locking the Fed into a specific policy outlook.
Wednesday’s policy meeting is the first for Warsh, who was appointed by Trump after the president sharply criticized Warsh’s predecessor, Jerome Powell, for not reducing rates deeply enough. The attacks largely backfired because they prompted Powell to stay on the Fed’s governing board, where he voted Wednesday in favor of keeping rates at about 3.6%.
Warsh now faces a difficult choice: The Fed typically seeks to combat inflation by lifting interest rates to slow borrowing and spending and cool the economy. Yet taking such a step would likely attract the ire of the White House, and could lift the cost of mortgages, auto loans, and other borrowing, just before the midterm elections.
If the Iran war is resolved, gas prices will likely continue to decline and inflation may cool in the coming months. But prices of many goods and services — such as clothes, dental care, and child care — were rising before the Iran war, and inflation has been above the Fed’s 2% target for five years, suggesting that there may still be inflationary pressures in the economy.
Warsh also faces a sharply different economic environment than when he appeared to campaign for the job of Fed chair last year. Back then, he was outspoken in favor of lower interest rates, as Trump has demanded. He pointed to the development of AI as a technology that could vastly expand the economy’s ability to produce goods and services cheaply, which would over time bring down inflation.
Even then, many economists were skeptical of his claim. At least in the short run, analysts note that soaring investment in semiconductors and computing equipment is contributing to higher inflation.
Indeed, since the Iran war began Feb. 28, inflation has accelerated to a three-year high of 4.2%, lifted mostly by costlier gas stemming from the Iran war. The Fed typically fights higher inflation by raising its key interest rate to cool spending and growth.
Trump has announced an initial peace agreement that could bring the three-month conflict to an end, but it’s not clear if peace will hold. And even if oil flows freely out of the Middle East again, it could take months for prices of gas, groceries, and items such as airline fares, to cool. Already, inflation according to the Fed’s preferred measure has topped its 2% target for more than five years.
At the same time, hiring has picked up in recent months, removing a key rationale for cutting rates. In January, the Fed forecast that it would reduce rates twice this year, as part of its quarterly economic projections. A big reason for those potential cuts is that employers were shedding jobs and policymakers worried that the unemployment rate would rise. The central bank typically cuts its key rate to spur economic growth and hiring.
But earlier this month a government report showed that hiring jumped in May, when employers added 172,000 jobs, the third straight month of solid job gains.
Since returning to the White House last year, Trump has repeatedly demanded that the Fed cut its key rate. Yet in recent weeks as inflation has picked up, he has said he wants “Kevin” to be independent and make his own decisions. But he also said earlier this month that the Fed shouldn’t raise rates, despite higher inflation.
Trump repeatedly attacked Warsh’s predecessor, Jerome Powell, for not cutting rates deeply enough. In January, the Department of Justice even launched an unprecedented investigation into Powell over brief testimony he gave last July about a building renovation. A federal judge threw out the DOJ’s subpoenas in the case and the government dropped the investigation.
The move largely backfired, as Powell decided to stay on the Fed’s board of governors even after his term as chair ended May 15. He can serve a separate term as governor until January 2028. By staying on, he has denied the Trump administration an opportunity to fill an additional seat on the seven-member board. Powell is expected to vote on the Fed’s rate decision Wednesday.
