Will the Federal Reserve Raise or Lower Interest Rates in 2026? Here's What the Data Suggests.

The Federal Reserve’s interest rate decisions have a major impact on the markets. When it raised its benchmark rate 11 consecutive times in 2022 and 2023, from nearly 0% to 5.25%-5.50%, many stocks crumbled. But when it reduced its rates six consecutive times in 2024 and 2025, ending at a range of 3.50%-3.75%, many of those stocks bounced back.

However, the Fed has left its benchmark rate unchanged through four Federal Open Market Committee (FOMC) meetings this year, even after Kevin Warsh succeeded Jerome Powell as the new Federal Reserve Chairman on May 22. Warsh’s decision to keep interest rates steady during the mid-June FOMC meeting didn’t surprise investors. Still, he also stopped the Fed from providing any forward guidance and refused to submit his own interest rate projections.

Those bold changes indicated that Warsh wanted the Fed to react to economic data, rather than have the market react to the Fed’s future expectations. That makes it much more difficult to predict where interest rates might head in the second half of 2026, but we can take a closer look at the relevant data to see if we’re on track for more rate cuts or rate hikes.

Why rate cuts are highly unlikely

The Fed’s long-term goal is to keep inflation at about 2%. If inflation rises too quickly, it raises rates to temporarily throttle economic growth. Once inflation cools down to acceptable levels, it cuts rates to spark fresh lending and spur more economic growth again.

At the beginning of 2026, many investors expected the Fed to continue to cut interest rates as inflation declined. However, the outbreak of the Iran war in late February doused those hopes by driving up energy prices and disrupting global supply chains.

In May, U.S. inflation rose 4.2% year over year, the highest rate in three years. Even though the U.S. and Iran recently reached a new 60-day ceasefire agreement, that truce is fragile and probably won’t reduce inflation anywhere close to 2%. That’s why investors shouldn’t expect any rate cuts in the second half of the year.

Why rate hikes could be on the table

If the peace talks between the U.S. and Iran go nowhere, the Strait of Hormuz will likely stay closed, inflation will remain high, and the Fed will need to raise rates. Those rate hikes will hurt stocks, which rely on strong economic growth, and traditional government and corporate bonds, which will become less valuable than newer, higher-yielding bonds.

Therefore, the second half of the year could be rough for both the Vanguard S&P 500 ETF (VOO +0.34%) and the Vanguard Total Bond Market ETF (BND 0.11%). But if you plan to stay invested for years instead of quarters, you should tune out that near-term noise and remember the stock and bond markets have survived plenty of interest rate hikes before.