But a big drop in energy prices could cool things down. John Williams, head of the New York Fed, feels more upbeat because of it. Yet many Fed officials still expect to raise rates again this year.
Williams said in an interview on Tuesday that falling energy costs make him "a little bit more positive about the near-term inflation outlook because of the energy price declines that we're going to see." The reason: A peace accord that restored navigation through the Strait of Hormuz, which had been nearly shut down earlier this year due to conflict between the US and Iran, caused oil prices to plummet sharply. That agreement quickly restored global crude flows, sending prices down sharply and providing immediate relief to consumers and businesses.
Williams said current monetary policy is appropriate for now. "My view is that monetary policy is well-positioned," he stated.
The Federal Open Market Committee "strongly agreed" to eliminate forward guidance about future rate moves from their official statement after the June meeting, a decision that was unanimous. Williams explained: "Given the uncertainties that we face in terms of inflation, the economic outlook, trying to give explicit forward guidance about where interest rates are going to be was no longer appropriate. The uncertainties are too great."
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So far in 2026, the Fed has held its benchmark rate steady. However, persistent inflation has led investors to increasingly wager that officials will raise rates before the end of the year.
The Fed's preferred measure of inflation is the personal consumption expenditures (PCE) price index. In May, headline PCE stood at 4.1%, while core PCE - which excludes volatile food and energy - remained at 3.4%. Both figures are well above the central bank's 2% target.
Because energy prices are a major component of headline inflation, the recent oil decline directly lowers the overall rate, even if core prices stay elevated. This dynamic gives the Fed room to assess whether additional tightening is needed without immediately reacting to one-time price swings.
Energy prices are a major component of the headline inflation figures that the Fed tracks. When oil costs drop sharply, it directly lowers the overall inflation rate, even if other categories remain elevated. That dynamic is especially relevant now: core inflation - which strips out volatile food and energy - remains at 3.4%, well above the Fed's 2% target.
Williams's optimism suggests that the recent energy decline could help bridge that gap, buying the central bank time to assess whether further rate moves are necessary. Still, with nine policymakers expecting at least one hike this year, the next few months will be critical as the Fed balances falling energy costs against stubborn core prices.
The next Fed meeting is in Washington at the end of July. So far, officials have disclosed little about their intentions.
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