Middle East Conflict Reshapes Fed Expectations: Nearly Half of Policymakers Shift Toward Rate Hike Expectations, Inflation Forecasts Revised Upward

Odaily reported that foreign media analysis indicates nearly half of the Federal Reserve's policymakers no longer believe that simply maintaining borrowing costs at current levels will be sufficient to drive inflation back down to the 2% target, following a surge in oil prices after the Iran conflict. The Fed’s latest dot plot, which reveals individual policymakers' views on the interest rate path, shows a rapid shift in the focus of internal debate: previously centered on how long to hold rates steady before cutting them, the discussion has now turned to growing concerns about rate hikes—with some even convinced the Fed will need to raise rates.

Additionally, forecasts released on Wednesday show that Fed policymakers have become more pessimistic about inflation since March, reflecting the sharp rise in inflation since the outbreak of the conflict. The median projection indicates that the year-over-year change in the PCE price index is expected to reach 3.6% by year-end, compared to the 2.7% forecast in March; the core PCE price index is expected to rise by 3.3% year-over-year, versus the 2.7% forecast in March; the unemployment rate by year-end is projected at 4.3%, unchanged from the actual reading in May and below the 4.4% forecast in March. This implies growing confidence that the labor market is not weakening and does not require support through rate cuts. (Jin Shi)