The Federal Reserve held its benchmark interest rate unchanged at its April meeting, as investors had expected.
But with a fresh wave of inflationary pressures percolating through the economy, some investors are naturally wondering: Why didn’t the Fed hike—and could hikes still lie ahead?
Read on for more on why the Fed isn’t rushing to raise rates, whether hikes—or further cuts—could be coming later in the year, and what investors should be doing now.
Inflation is heating up: Why the Fed isn’t hiking
Inflation has accelerated markedly in recent readings, reflecting disruptions related to the Middle East conflict. The Consumer Price Index (CPI) rose at a 3.3% annual pace in March, its hottest rate in almost 2 years.
But so far, that increase has been overwhelmingly driven by a single narrow source: energy costs. The price of energy rose at a 12.5% annual pace in March—encompassing a 19% annual pace of increase in the price of gasoline, and a 44% annual pace of increase in fuel oil.1
The Fed generally puts less weight on headline inflation and focuses more on “core inflation,” i.e., inflation measures that strip out the impacts of food and energy prices. That’s because food and energy prices tend to be very volatile month to month, while the Fed cares more about the broader inflation trajectory (the Fed has little ability to influence precise month-to-month price changes, even if it wanted to). In fact, core inflation rose less than expected in March, showing that new inflationary pressures haven’t yet rippled far beyond energy.
The Fed is also hesitant to respond because its policy tools can’t address the root cause of the latest inflationary pressures. Raising interest rates can slow the overall economy. But the newest inflation wave isn’t driven by a hot economy—it’s driven by very specific energy supply constraints.
“Adjusting interest rates doesn’t increase the quantity of oil in the global economic system,” says Aditi Balachandar, research analyst on Fidelity’s fixed income team.
Could rate hikes follow further down the line?
Still, there are parallels between the current inflation resurgence and the 2021–2022 surge, which saw CPI inflation crest at more than 9%. Those parallels may raise investor concerns that another round of rate hikes could eventually follow.
The 2022 spike, similarly, occurred as geopolitical conflict was fueling higher energy prices. Supply-chain disruptions are again playing a role, as they did then. And again, these pressures are coinciding with a wave of fiscal stimulus—this time flowing from the One Big Beautiful Bill tax cuts—that has the potential to buoy consumers’ spending.
But the differences are substantial. In 2022 the job market was exceptionally tight, wage growth was surging, and inflation pressures were relatively broad—creating the kind of perfect inflation storm that central banks typically try to circumvent. Today, by contrast, the labor market appears stable, but much cooler than it was 4 years ago. Wage growth has slowed, making it harder for companies to raise prices. The immediate impact of fiscal stimulus is more modest now than it was during and through the pandemic. And so far, those inflationary pressures have remained narrowly limited to energy.
In other words, no perfect storm has appeared on the horizon so far. A more problematic backdrop would likely involve clear signs that inflation pressures are becoming more persistent, such as rising inflation expectations, faster wage growth, and price increases spreading more broadly across the economy, says Andrew Garvey, lead monetary policy analyst on Fidelity’s Asset Allocation Research Team.
“In the short term they are going to look through this, as they often have with energy-price shocks,” says Garvey. “But they will be waiting to see if this affects the longer-term trend.”
What about rate cuts?
While renewed inflation pressures haven't been strong enough to put rate hikes on the table anytime soon, they have been strong enough to push rate cuts off the table, at least for now.
Investors now expect no rate cuts over the course of 2026, based on expectations implied in derivatives markets. Around the start of the year investors were expecting 1 to 2 more rate cuts over the year, but those expectations have shifted since the start of the Middle East conflict. “The Fed doesn’t want to be cutting into rising inflation,” says Garvey.
Plus, with the unemployment rate holding fairly steady so far this year, fears of a deterioration in the job market have abated—reducing any sense of urgency around the need for further rate cuts.
“The bar to hike is very high, but the bar to cut is also high now, because of the stickiness in inflation,” says Balachandar. “So where does that leave them? On hold.”
What should investors do now?
There are no easy answers as to exactly how the economy unfolds from here, or what that will mean for interest rates.
While markets currently expect no rate cuts or hikes for the remainder of 2026, that expectation could always shift—in either direction—as new data comes in and as the Fed’s upcoming leadership change plays out. Long-term interest rates can be even more difficult to forecast, due to the complexity of the forces that drive them.
Rather than try to forecast where interest rates may head next, many investors might be better served by an investing plan that’s suited to their goals, needs, time horizon, and risk tolerance, and that they can stick with through a variety of interest-rate and market environments.
If you need help making a plan (or making one you can stick with), you can learn more about connecting with a financial professional.