The Federal Reserve left interest rates unchanged this week, maintaining the federal funds rate in a target range of 3.5% to 3.75%.
While the Fed left rates unchanged, updated projections from policymakers point toward a different outlook than earlier this year.
Federal Reserve officials now expect interest rates to finish 2026 slightly higher than current levels, reversing projections issued three months ago that anticipated rate cuts.
The Federal Open Market Committee described the economy as expanding at a solid pace, supported by strong productivity growth, business investment, and a stable labor market. Job growth has continued to keep pace with workforce growth, while the unemployment rate has remained relatively unchanged.
At the same time, inflation remains above the Fed’s 2% target. Consumer prices rose 4.2% in May compared to a year earlier, the highest annual inflation rate since 2023. Federal Reserve officials pointed to higher energy prices and broader supply disruptions as key drivers of recent inflation pressures.
The Fed’s challenge stems from the nature of the current inflation spike. Higher interest rates can cool demand throughout the economy, but they do little to address supply-driven increases in energy costs. Policymakers appear concerned that elevated energy prices could eventually spill into other sectors if inflation remains elevated for an extended period.
Despite those concerns, inflation outside food and energy remains considerably lower. Core inflation measured 2.9% in May, suggesting broader price pressures have not accelerated at the same pace as energy costs.
The labor market has also strengthened in recent months. Employers added an average of 188,000 jobs over the last three months, reducing pressure on the Federal Reserve to lower rates to support employment.
For state and local governments, the Fed’s decision offers another reminder that borrowing costs will likely remain elevated for the foreseeable future. Interest rate expectations influence everything from infrastructure financing and capital projects to economic growth and revenue forecasts.
Read the complete Federal Open Market Committee statement for additional information.
