Fed practices patience
As expected, the Federal Reserve left its benchmark interest rate in a target range of 3.5%-3.75%—the fifth-consecutive pause since a 0.25% cut in December 2025:
Source (data): Federal Reserve. Values represent upper end of Fed funds target range. (For illustrative purposes. Not a recommendation.)
Although the market-based probability of a rate hike was only around 36% in the hours before the announcement, that represented a relatively high level of uncertainty compared to previous meetings.
Downside inflation surprises from the Consumer Price Index (CPI) and Producer Price Index (PPI) earlier this month appeared to ease some concerns about potential hikes this year. However, surging oil prices after the US-Iran ceasefire broke down appeared to increase speculation about the limits of the Fed’s patience, especially given Chairman Warsh’s description of inflation as a “choice.”
Last week, US spot crude oil prices pushed above $90, while global Brent crude oil prices topped $100. Although both markets pulled back from those highs, they have continued to be volatile, and are still up significantly for the year. The core PCE Price Index—the Fed’s preferred inflation measure—came in at 3.4% in May, well above the Fed’s 2% target (June’s reading is due on Thursday).
Despite higher oil prices, Morgan Stanley & Co. economists expected the Fed to leave rates unchanged, given signs of disinflation elsewhere in the economy. But they also pointed out the Fed is “running out of patience” with above-target inflation, and would likely pivot to rate hikes later this year if price pressures don’t ease as expected.1
Note: The Fed’s next policy meeting is scheduled for September 15-16, 2026.
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1 MorganStanley.com. July FOMC Preview: Patient, not out of patience. 7/24/26.