Divided Fed officials said at their last meeting that they would address persistent inflation with one rate hike this year. But history suggests that policymakers will have a hard time stopping there.
In fact, over the past 35 years or so, the Fed has rarely raised or lowered interest rates more than once. Rather, the central bank’s Federal Open Market Committee tends to move with interest rate cycles, adjusting policy many times over a period of time to achieve the goals it seeks to achieve.
“A lot of people are talking about one rate hike. The committee doesn’t usually do that. So what’s the point in that?” former St. Louis Fed President Jim Bullard told CNBC on Monday. “So that usually means a tightening cycle, and I think the market is trying to sniff that out now.”
Markets will get further clues about the Fed’s policy direction on Wednesday when the committee releases the minutes of its June 16-17 meeting. The summary provides a behind-the-scenes glimpse into new chairman Kevin Warsh’s first meeting, which he characterized last month as a “good family fight” over the direction of interest rates.
cycle history
The last meeting provided an update on participants’ views on interest rates and key economic indicators, as well as a much shorter statement that simply said: “The Committee will achieve price stability.”
A “dot plot” grid showing individual participants’ interest rate forecasts showed the committee was leaning toward raising rates by the end of 2026 and cutting rates once in each of the next two years.
However, looking back at the history of the FOMC, interest rate adjustments have rarely been made as a one-off.
In the last cycle, it cut rates three times in the second half of 2025. Prior to that, the Fed cut rates three times in 2024, raised rates 11 times from 2022 to 2023, and cut rates five times from 2019 to 2020.
In fact, you have to go back to 2015 for the last time the committee took any action, largely because it believed the economy was too volatile for the previously planned rate hike cycle. Going back to 1990, there were very few such movements.
The reason is extremely simple. Officials believe policy needs to be sustained and aggressive, and that modest adjustments such as quarter-point moves will do little if the Fed is trying to solve the problem.
In this case, the central bank’s problem is inflation, which has been running well above its 2% target for the past five years. Some officials believe that easing hostilities in the Middle East, lower oil prices and the waning impact of tariffs could help ease price increases, but there is wide disagreement over whether the trend is downward or upward.
Bullard is less convinced that inflation will ease, and believes the Fed may need to act quickly before November’s midterm elections, even though he recognizes the political risks of raising interest rates. President Donald Trump, in particular, may become restless after appointing Warsh to replace current Gov. Jerome Powell.
“If we wait until after the election, we may have to do more, and that’s exactly the risk for the commission here,” Bullard said. “If we wait too long, we could be in the winter or early next year. We have to do a lot of work now to get inflation under control.”
However, the minutes themselves may provide fewer clues than in previous years.
Investors looking for deeper insight into internal discussions may be disappointed, as the Warsh Fed appears to have no plans to provide much direct communication or “forward guidance” about its future direction.
The minutes were already cryptic enough, with officials kept anonymous and vague quantifiers used to reflect the group’s feelings at the meeting. There could be more uncertainty under Warsh’s leadership.
“We expect Mr. Warsh to keep the FOMC minutes from containing too much information regarding the views expressed at the FOMC meeting,” Steve Englander, a strategist at Standard Chartered, said in a client note.
“In particular, the ‘participant views’ section could see a significant reduction in language such as ‘nearly all/most/many/some/few/some/one’ indicating the degree of support among participants for different views, risks and policy options,” he added. “We think the minutes will become an even more lethargic list of policy decisions, like they were when Paul Volcker was chairman.”
Volcker, who stopped inflation, was in office from 1979 to 1987.
Inflation outlook changes
Although investors seem to believe that inflation will move back toward the Fed’s goals over time, consumers have expressed considerable discomfort about future price increases.
U.S. Treasuries, which investors use to price in inflation expectations, have been weak. The five-year and 10-year “break-even” interest rate, or the difference between the yield on U.S. Treasuries and inflation-protected bonds, is hovering near its lowest levels this year, and other benchmarks are following suit.
However, the New York Fed’s June monthly consumer survey showed inflation expectations at multi-year highs, with the one-year outlook (3.7%) the highest level since September 2023 and the three-year outlook (3.3%) the highest since June 2022.
But the market is largely in line with the Fed’s June blueprint.
Traders are pricing in a rate hike as early as September, according to CME Group’s FedWatch tool, after which policymakers expect to keep rates on hold for at least next year. Futures markets are pricing in further rate hikes, but that will come later.
Not everyone agrees, and some on Wall Street expect the Fed to take more aggressive action.
Bank of America recently raised its rate outlook, saying the central bank will need to approve three quarter-point rate hikes by the end of this year.
“We were skeptical about the need for a rate cut in 2025,” BofA economist Aditya Bhave said in a note. “The data and our latest reading of the Fed’s reaction function suggest the Fed will reverse its rate cuts in the near term.”
But the central bank expects the rate hike cycle will be short-lived and that the Fed could keep rates on hold in 2027 after demonstrating its determination to rein in inflation.
