Expectations are growing that the Federal Reserve is on a path to raise – not lower – interest rates this year.

Inflation has remained stubbornly high, and in May, the Consumer Price Index showed a 4.2 percent increase in prices during the previous year, while the Personal Consumption Expenditures Price Index – the Fed’s preferred measure of inflation – came in at 4.1 percent. The Federal Reserve’s target inflation rate is 2 percent, but the CPI has not been at or below that level since February 2021.

Energy costs, in particular, have driven prices higher this year, with the conflict in Iran tightening fuel supplies. The core inflation rate – CPI excluding food and energy – in May was 2.9 percent, according to the Bureau of Labor Statistics.

The economy, meanwhile, seems to be doing fine without additional help from monetary policy. The Bureau of Economic Analysis revised the first quarter growth rate upward to 2.1 percent, and the unemployment rate has held steady at 4.3 percent for the past three months and has not been higher than 4.5 percent since September 2021. Jobs growth in May totaled 172,000, exceeding expectations, and has been no lower than that since February.

Jerome Powell stepped down as Fed chair in May after a year and a half of frequent criticisms by President Trump that he was not doing enough to lower interest rates. But Trump’s appointee as Powell’s replacement – Kevin Warsh – voted at his first Federal Open Market Committee meeting in May to keep rates unchanged and has not given any indication since then that he will push for reductions.

The Fed’s post-meeting statement became shorter under Warsh than it was under Powell and the bulk of it stated, with the unanimous support of all voting members, including Warsh: “Economic activity is expanding at a solid pace despite elevated uncertainty that owes, in part, to the conflict in the Middle East. Productivity growth and capital investment are strong. Job gains have kept pace with the workforce, and the unemployment rate has changed little. Inflation remains elevated relative to the Committee’s 2 percent goal, in part reflecting supply shocks that have driven price increases in certain sectors, including energy. The Committee will deliver price stability.”

Fed statements typically use the same phrasing after every meeting, and even minor changes in wording are parsed for indications about future plans. The last sentence is a new one and – given the Fed’s dual mandate of maximum employment and price stability – might indicate that the central bank is now more focused on restraining inflation. The statement after the April meeting, in contrast, asserted, “The Committee is strongly committed to supporting maximum employment and returning inflation to its 2 percent objective.”

As a result of these factors, many analysts are now debating not if the Federal Reserve will raise interest rates this year, but by how much. Bank of America is predicting rate hikes totaling 75 basis points, and CME Group’s FedWatch forecasts a 66 percent likelihood of an increase of at least 25 basis points before 2027, with a nearly 1 in 3 chance of a quarter-point hike at the Fed’s July meeting. CNBC reported that, “Markets are also pricing in a 23.5% chance that rates will be at least half a percentage point higher by December.”

The target range for the federal funds rate is currently 3.5 to 3.75 percent.

Confidence in the manufacturing sector increased in May, with the Institute for Supply Management’s Purchasing Managers Index reaching its highest point in four years

“Looking at the manufacturing economy, only 2 percent of the sector’s gross domestic product contracted in May, compared to 19 percent in April, and the percentage of manufacturing GDP in strong contraction … was also 2 percent, the same as in April,” the chair of the institute’s Manufacturing Business Survey Committee said.

Notwithstanding the overall gains, several respondents to the institute’s May survey cited concerns about prices, the supply chain, and instability in the Middle East.

The Index of Consumer Sentiment from the University of Michigan Surveys of Consumers recorded a 10.5 percent increase from May to June, though the June reading was still well below the level of a year earlier.

“Expected business conditions over the next five years surged 16% as consumers’ worries over long-term consequences of the Iran conflict appear to be easing,” the Surveys of Consumers director said. “Still, sentiment remains in unfavorable territory at 13% below the February 2026 reading prior to the start of the Iran conflict, and nearly 20% less than a year ago. The cost of living remains at the forefront of consumers’ minds; for the third straight month, over half of consumers spontaneously mentioned that high prices are weighing down their personal finances.”

The Conference Board’s Consumer Confidence Index, meanwhile, reported a slight dip from April to May, with the board’s chief economist saying that a significant part of the reason for the decline was that “the inflationary impacts of the war in the Middle East intensified.”

Housing starts in May fell 15.4 percent from April and were 8.7 percent below May 2025, the Census Bureau and the Department of Housing and Urban Development reported. Existing home sales, though, increased 3.2 percent during that time, according to the National Association of Realtors.

“Improving affordability is helping drive this momentum,” the association’s chief economist said. “Even with mortgage rates ticking up compared to earlier in the year, they remain lower than a year ago and are essentially at the long-term historical average. Income gains are also outpacing home price growth by a small margin in most parts of the country.”

The Dow Jones Industrial Average closed at 51,876.11 on June 26, up 7.9 percent on the year and up 14.9 percent since the March 27 nadir of the month-long dip that followed the start of military operations in Iran. The S&P 500 Index ended June 26 at 7,354.02, recording a year-to-date gain of 7.4 percent.

The dollar, on June 26, was trading at 0.88 euros, 0.76 pounds, 161.81 yen and 6.79 yuan.