June 17, 2026: The Federal Open Market Committee (FOMC) of the Federal Reserve voted unanimously, 12–0, to keep the federal funds rate target range unchanged at 3.50%–3.75%. This marks the fourth consecutive meeting where the Fed has held rates steady since its last rate cut in December 2025. The interest rate decision itself wasn’t the main focus for markets—instead, the real catalyst for widespread discussion was the simultaneous release of the Summary of Economic Projections and the dot plot, which revealed a deeper reality: inflation has deviated from the 2% target for more than five years, and the Fed’s median forecast for core PCE inflation at the end of 2026 was sharply revised upward from 2.7% in March to 3.3%.
Five years. Since inflation began to surge in 2021, reaching its highest levels in about four decades, the Fed’s policy trajectory has covered the full cycle—from labeling inflation as "transitory," to aggressive rate hikes, then a retreat as inflation cooled, only to see a renewed rebound. Yet, by mid-2026, the 2% inflation target remains elusive, appearing even more distant for the foreseeable future. This article seeks to answer a central question: Why can’t the Fed return to the 2% target era? The answer unfolds across three dimensions: the logic behind upward inflation forecasts, the fundamental shift in the Fed’s policy framework, and the structural nature of supply shocks.
A Policy Meeting Redefined by Hawkishness
The June FOMC policy statement contained just 130 words, making it the shortest in 19 years. The statement removed all hints about the future direction of rate adjustments, fully downplaying the forward guidance that was a hallmark of the Powell era. In his first press conference as Fed Chair, Kevin Warsh made it clear that the Fed has abandoned forward guidance and that he cannot offer any specific outlook for future actions. He likened the dot plot to "a pencil with an eraser," emphasizing that his colleagues understand the world is changing rapidly and will not be bound by views formed six weeks ago.
Behind this dramatic shift in communication lies a substantive deterioration in inflation forecasts. The overall PCE inflation forecast for 2026 was raised from 2.7% in the March SEP to 3.6%, and core PCE from 2.7% to 3.3%. The 2027 forecasts were also revised upward—core PCE moved from 2.2% to 2.5%. Notably, the dot plot showed that 9 out of 18 officials who submitted forecasts expect at least one rate hike before the end of 2026, with 6 advocating a cumulative increase of 50 basis points or more. In contrast, the March forecast saw no one expecting a rate hike within the year. The median expected federal funds rate at the end of 2026 rose from 3.4% to 3.8%.
What does this mean? In just three months, the internal consensus at the Fed shifted from "one rate cut this year" to "at least one rate hike, possibly more." The sole driver of this reversal: inflation.
The Structural Roots of Inflation Deviation
Inflation’s failure to return to 2% for five consecutive years isn’t the result of a single event, but rather a combination of structural factors.
The first factor is geopolitical shocks driving energy price volatility. The Iran war pushed global energy prices higher. Although recent signs of peace between the US and Iran have led to some easing in international oil prices, inflation’s lagging effects remain pronounced. In May, the US Consumer Price Index rose 4.2% year-over-year, breaking above 4% for the first time in three years and marking the fastest increase since May 2023. The Fed’s statement made it clear that inflation partly reflects supply shocks pushing up prices in sectors like energy.
The second factor is the inflationary transmission from tariff policy. President Trump’s tariffs have put new upward pressure on the prices of imported goods. Unlike energy shocks, the inflationary impact of tariffs tends to be more persistent—it directly alters the relative prices of imports, and these adjustments are rarely one-off.
The third factor stems from structural domestic demand in the US. The AI boom has fueled data center construction, expanded electricity demand, and sustained capital expenditure. Combined with the wealth effect from a rising stock market, these are increasingly seen by policymakers as new sources of near-term inflation. In May, retail sales rose 0.9% month-over-month, far exceeding expectations, and the year-over-year growth rate climbed to 6.9%, the highest in three and a half years. The resilience of consumer demand means that even if energy prices fall, inflationary pressure from the demand side continues to build.
The fourth factor is the stickiness of core services prices. Economists at Bank of America note that the inflation decline driven by housing factors has largely ended, while other core services prices remain highly sticky. This suggests that even if goods inflation recedes as supply recovers, the structural nature of services inflation will keep core PCE above target.
China Merchants Bank Research Institute commented that productivity growth and capital investment remain strong, but inflation deviation has persisted for over five years. Warsh acknowledged in his press conference that persistently high prices are burdening Americans. The key issue, however, is that the Fed cannot significantly impact specific prices—such as those driven by supply shocks like energy. Its core task is to ensure there are no "second-round price effects." This statement clarifies the policy anchor of the Warsh era Fed: not to directly counter supply shocks, but to prevent inflation expectations from becoming unanchored.
From "Forward Guidance" to "Data Dependence": A Fundamental Policy Shift
Warsh’s first FOMC meeting as Fed Chair may prove more significant for institutional change than for the rate decision itself.
He announced the creation of five dedicated working groups covering communication mechanisms, balance sheet management, macro data sources and data dependence systems, productivity and labor market research, and inflation policy framework and the impact of new technologies. Each group plans to complete a comprehensive review and submit reports by year-end. This marks the Fed’s largest policy framework overhaul since the 2008 financial crisis.
Warsh’s critique of the Fed’s current data system is noteworthy. He pointed out that most of the Fed’s data relies on "old-fashioned survey methods," which struggle to capture the economic reality of 2026. Survey response rates are insufficient, and the questions asked may have been relevant a generation ago, but are less so today. He even expressed openness to incorporating real-time data from private firms and stressed that financial market prices are the most important information for guiding central bank decisions.
What does this imply? The Warsh-era Fed is shifting from "managing market expectations" to "relying on real-time data and economic reality." The logic behind abandoning forward guidance is that markets perform best when responding to real-time data, and market prices themselves are the most important reference point. If markets simply reflect what the Fed says, it’s akin to "removing the most important source of information and ignoring it."
This shift has profound implications for inflation management. Under Powell, the Fed used forward guidance to anchor market expectations for the rate path, thereby influencing financial conditions and indirectly affecting inflation. Warsh’s logic is: rather than having the market guess the Fed’s intentions, let the Fed observe market price signals. This "market-centric" decision philosophy means future policy adjustments will be more dependent on real-time data, harder to predict, but potentially more precise.
Market Repricing and Rate Hike Path Analysis
The Fed’s hawkish signals were quickly priced in by the market.
The interest rate futures market saw dramatic repricing before and after the meeting. Before the meeting, the implied probability of a September rate hike was only about 27%; after the meeting, it surged to around 83%. The October meeting is now fully priced for a rate hike, with cumulative rate hike expectations by year-end reaching about 155 basis points. The two-year Treasury yield jumped roughly 12 basis points in a single day, the largest daily increase since April 2025.
Meanwhile, different institutions have diverged significantly in their rate hike path forecasts. Deutsche Bank expects the Fed to raise rates by a total of 50 basis points in 2026, pushing rates to 4.1%, with a possible hike as early as July. On June 22, Bank of America reversed its previous outlook, now forecasting three rate hikes totaling 75 basis points this year, with a July hike "under consideration." Bank of America economist Aditya Bhave bluntly stated, "The Fed’s inflation problem has clearly worsened."
However, the actual implementation of rate hikes remains uncertain. Donghai Securities noted that expectations for rate hikes are mainly driven by inflation from rising oil prices. The US and Iran have signed an agreement; if oil prices subsequently trend downward and the impact on inflation is further confirmed to be fading, rate hike expectations for the year may still be rolled back. Fed official Goolsbee also said the Fed needs to assess whether temporary shocks—such as tariff hikes or the Iran war driving up energy prices—are the sole factors pushing inflation higher.
For the cryptocurrency market, rising rate hike expectations signal a continued tightening of liquidity conditions. As the market starts trading "higher rates for longer" or even "renewed rate hikes," the focus for crypto shifts from geopolitical events to whether new sources of liquidity will emerge. With rate cut expectations shrinking dramatically and persistent pressure on funding, risk assets face a more severe valuation test in the short term.
Conclusion: The Distance to the 2% Target
Returning to the central question: Why can’t the Fed return to the 2% target era?
The answer is not singular. Repeated supply shocks, the inflationary effects of tariff policy, structural resilience on the demand side, and the stickiness of core services prices together form systemic barriers to inflation returning to target. The Fed’s own policy framework is undergoing profound transformation—from reliance on forward guidance to data dependence, from managing expectations to observing the market. This shift itself is redefining what "inflation management" means.
Warsh emphasized in his press conference that the 2% inflation target is not within the scope of the working groups’ research, and there is no reason to revisit the target before it is achieved. Yet, with the core PCE forecast for 2026 revised up to 3.3% and the 2027 forecast still at 2.5%, the market has reason to question: After five years of persistent deviation, is 2% an achievable target, or merely a promise that keeps being postponed?
The answer may depend on the evolution of three variables: whether the Middle East situation can truly cool down and drive energy prices back to normal; whether the inflationary effects of tariff policy will persist over a longer timeframe; and whether, under Warsh’s leadership, the Fed can find a more effective path to inflation management than "higher for longer" through institutional innovation. Until then, 2% remains a goal worth pursuing—but one that may prove difficult to reach.
