The published minutes of the U.S. Federal Reserve’s June meeting showed that a rate hike is still not the baseline scenario. Despite growing inflation concerns, the Fed continues to factor in the risks of an economic slowdown and a deterioration in labor market conditions.
Inflation remains the main risk
Meeting participants acknowledged inflation as the most significant risk to the U.S. economy. The minutes note that price growth is being supported by:
- the pass-through of previously introduced tariffs into final prices;
- higher energy and commodity costs amid the conflict in the Middle East;
- strong investment demand associated with AI development.
At the same time, the Fed recognizes that part of the inflationary pressure is temporary. Some experts believe companies are wary of further price increases due to weaker demand and the risk of losing market share. In addition, the adoption of artificial intelligence over the long term can boost labor productivity and have a disinflationary impact on the economy.
The labor market argues against a rate hike
Despite tougher rhetoric on inflation, the Fed is not taking labor-market risks off the agenda. Some participants noted slower hiring and a decline in job openings, which may indicate cooling in the labor market. At the same time, wage growth, in the regulator’s view, remains compatible with the 2% inflation target.
This, according to Freedom Broker analysts, remains one of the key arguments against a rate hike in the coming months.
Two Fed scenarios
- If inflation continues to slow and begins to return to the 2% target, the regulator will keep the current rate or, over time, may move to cutting it.
- If high inflation persists alongside a resilient labor market, the Fed may tighten monetary policy. Among potential risk factors, the regulator highlights strong demand from the artificial intelligence sector, the consequences of the conflict in the Middle East, and the impact of trade tariffs.
Freedom’s forecast for the Fed rate
Freedom believes that a rate hike in fall 2026 would require new evidence of persistent inflationary pressure. Data for June–August will be of key importance.
The analysts’ baseline scenario assumes moderate inflation in the coming months. A reason for a rate hike may emerge only if the core PCE deflator averages above 0.27% month over month across June, July, and August. For now, this scenario is not the primary one.
Despite the acceleration of the core PCE deflator in May to 4.1% year over year—the highest level in the past 3 years—analysts expect a slowdown in inflationary pressure in June–August due to lower oil prices and a gradual weakening of the energy factor’s impact.
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