As per the recent inflation and economic growth data, the US economy is facing the dual challenge of rising and slowing growth, complicating the Federal Reserve’s task of balancing price stability with economic growth.
The first-quarter US gross domestic product (GDP) growth was revised lower to 1.6% year-on-year for Q1 2026 compared to previously reported growth of 2%.
On the other hand, US PCE (personal consumption expenditures) inflation, the Fed’s preferred gauge, rose 3.8% year-over-year in April, the fastest since May 2023. The US consumer price index (CPI) also came at a three-year high of 3.8% in April.
Rising inflation and slowing economic growth are expected to dominate discussions at the Federal Open Market Committee (FOMC) meeting, scheduled for June 16–17 under the chairmanship of Kevin Warsh, as policymakers deliberate on benchmark interest rates.
The US Fed kept benchmark unchanged at 3.5%–3.75% for the third consecutive policy in April. Experts believe the US central bank may keep rates unchanged this year or may even consider a rate hike if inflation spikes. Notably, US inflation has been above the Fed’s 2% target since February 2021.
Can the Fed pivot to rate hikes?
According to Sidharth Sogani Jain, Founder, CEO and Fund Manager at Blue Aster Capital and CREBACO Global, with US CPI back at 3.8% and crude oil approaching triple digits, rates are staying higher for longer than most expect. The next move is more likely to be a hike than a cut.
More than the economic growth, US inflation dynamics, driven by higher gasoline prices, have turned more challenging for the Fed.
Namrata Mittal, CFA, Chief Economist, SBI Mutual Fund, underscored that the risk of further increases in breakeven inflation rates remains elevated. If this materialises, the incoming Fed Chair could adopt a more hawkish tone.
However, Mittal added that the bar for fresh rate hikes remains high.
Mittal pointed out that while higher oil prices have fed into broader inflation expectations, the US economy has evolved and is now a net energy exporter. This has changed the relationship between oil prices and growth, making elevated energy prices less damaging for the US economy than in earlier decades.
“This suggests that even with a sharp rise in crude prices, the Fed’s stance may shift more towards ‘how long to hold rates elevated’ rather than ‘when to cut’,” said Mittal.
Harshal Dasani, Business Head at INVAsset PMS, underscored that the fresh US GDP and PCE prints do not give the Fed a clean easing signal, as they show a more uncomfortable mix: growth is slowing, but inflation is not cooling fast enough.
While softer activity would normally open the door for rate cuts, Dasani believes sticky core inflation keeps that door only half-open.
“This is the exact kind of late-cycle macro mix where central banks prefer patience over speed,” said Dasani.
The implication could be a longer pause, not an imminent pivot. “The policy path now looks like ‘higher for longer’ by necessity, with the Fed waiting for either inflation to break lower or labour data to weaken enough to change the balance of risks,” Dasani added.
“A rate hike does not look like the base case because growth is losing some breadth, and consumption momentum is softening. But a rate cut also becomes difficult when the Fed’s preferred inflation gauge is still above comfort,” said Dasani.
In the current macroeconomic environment, the Federal Reserve is likely to remain more focused on containing inflation than supporting economic growth.
“Markets should stop reading every soft GDP print as bullish for liquidity. Weak growth with clear disinflation is good for cuts. Weak growth with sticky inflation is not. That is the distinction this data makes. The Fed’s margin for error has narrowed, and the next move will depend less on one GDP print and more on whether inflation finally gives policymakers permission to ease,” said Dasani.
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