Central banks, led by a more hawkish Fed under its new chairman, are signaling rates will stay higher for longer, with markets now pricing in at least one more hike this year and a slower path to eventual cuts.

July 2026 Capital Markets Update: Higher-for-Longer Rate Outlook

Recent developments have shifted expectations for interest rates both in the United States and globally. Financial markets are now pricing in one quarter-point rate hike by the Federal Reserve this year, with roughly a 20% probability of a second increase before year-end.

These expectations strengthened after the Federal Reserve’s new chairman reaffirmed the central bank’s commitment to controlling inflation during his June press conference. Reflecting that stance, about half of Federal Reserve policymakers now anticipate at least one additional rate hike this year.

The Federal Reserve is now expected to reduce rates much more gradually than previously anticipated. At the same time, the European Central Bank is also forecast to raise rates further before eventually easing policy.

The key takeaway is that central banks remain focused on preventing inflation from becoming entrenched. After the inflation surge that followed the pandemic, policymakers have adopted a more cautious and hawkish approach, making it clear they are willing to keep interest rates higher for longer, even as energy prices have moderated.