Fed could raise rates in 2026
What happened
- Morningstar said on May 26 investors are asking whether the Federal Reserve could raise rates in 2026 as stronger growth upends expectations for cuts. - FactSet said first-quarter 2026 S&P 500 earnings are tracking 28.4% growth, the strongest pace since late 2021, reinforcing the debate. - The Federal Reserve’s next policy meeting is in June, while CME FedWatch tracks market-implied odds for later 2026 moves.
Why it matters
Morningstar said on May 26 that investors are asking a question that looked remote earlier this year: whether the Federal Reserve could end up raising interest rates in 2026 instead of cutting them. The shift has emerged as U.S. stocks absorb stronger-than-expected first-quarter earnings, Treasury yields stay elevated and inflation worries linger. CME’s FedWatch tool shows traders are using fed funds futures to map those changing odds, while Federal Reserve officials have kept the focus on incoming data rather than promising easier policy. FactSet said first-quarter S&P 500 earnings growth is tracking at 28.4%, the fastest pace since the fourth quarter of 2021. ### Why are investors talking about a 2026 hike at all? Morningstar’s May 26 markets brief said the discussion has picked up because the old script of slowing growth, cooling inflation and lower rates no longer looks assured. The report linked the question directly to firm economic activity and to earnings that have held up better than many investors expected. (morningstar.com) CME Group says FedWatch reflects probabilities implied by 30-day fed funds futures prices, and those probabilities have become a shorthand for how markets see the policy path. CNBC reported on May 12 that traders had moved away from expecting rate cuts and had begun assigning a higher probability that the next move could be a hike after a hot inflation report. (morningstar.com) ### What in the earnings data is feeding that view? FactSet said that with 94% of S&P 500 companies reporting, the blended year-over-year earnings growth rate for the first quarter stands at 28.4%. FactSet also said 84% of companies beat earnings-per-share estimates and 81% beat revenue estimates. Charles Schwab said on May 6 that first-quarter earnings were tracking near 28% year over year, with profit margins also improving. (cmegroup.com) That combination matters for markets because stronger profits can support equity prices and reinforce the view that corporate demand and broader nominal growth remain resilient. ### What has the Fed itself said? The Federal Reserve’s March 18 Summary of Economic Projections set out participants’ forecasts for growth, unemployment and inflation through 2028, but it did not commit the central bank to a preset course. (factset.com) The Fed has continued to say policy decisions depend on the incoming data and the balance of risks to inflation and employment. (schwab.com) Morningstar wrote in a separate March 2 analysis that minutes from a recent Fed meeting suggested some officials were taking a more “two-sided” approach to policy, meaning they were not treating cuts as the only possible next step. That article also said such a stance did not mean hikes were certain or imminent. ### Why does this matter for AI and capital spending? (federalreserve.gov) Morningstar’s May 26 brief tied the rates debate to a market already dealing with heavy spending on artificial intelligence infrastructure. If investors start to assume money will stay expensive for longer, discount rates, financing costs and return assumptions for large capital projects can all change. (morningstar.com) Nvidia’s earnings and broader AI spending have helped keep attention on how much capital the technology sector is committing to data centers and related infrastructure. In that setting, any repricing of Fed policy can affect how investors value long-duration growth bets, even when company earnings remain strong. ### Does this mean a rate hike is now the base case? (morningstar.com) Morningstar’s reporting does not say a 2026 hike is the central forecast. It says investors are asking the question because the assumptions behind expected cuts have weakened. CME FedWatch, which CME says should be the attribution source for rate probabilities, remains the clearest public gauge of how traders are updating those odds between Federal Open Market Committee meetings. (morningstar.com) The next Fed meeting is in June, according to the CME FedWatch page, and investors will also be watching future inflation data, labor-market reports and corporate guidance for signs that growth is either cooling or staying too firm for the Fed to ease. (cmegroup.com)
Key numbers
- Morningstar said on May 26 investors are asking whether the Federal Reserve could raise rates in 2026 as stronger growth upends expectations for cuts.
- FactSet said first-quarter 2026 S&P 500 earnings are tracking 28.4% growth, the strongest pace since late 2021, reinforcing the debate.
- The Federal Reserve’s next policy meeting is in June, while CME FedWatch tracks market-implied odds for later 2026 moves.
- Morningstar said on May 26 that investors are asking a question that looked remote earlier this year: whether the Federal Reserve could end up raising interest rates in 2026 instead of cutting them.
What happens next
- Morningstar said on May 26 that investors are asking a question that looked remote earlier this year: whether the Federal Reserve could end up raising interest rates in 2026 instead of cutting them.
- stocks absorb stronger-than-expected first-quarter earnings, Treasury yields stay elevated and inflation worries linger.
- Morningstar’s May 26 markets brief said the discussion has picked up because the old script of slowing growth, cooling inflation and lower rates no longer looks assured.
Quick answers
What happened in Fed could raise rates in 2026?
Morningstar said on May 26 investors are asking whether the Federal Reserve could raise rates in 2026 as stronger growth upends expectations for cuts. FactSet said first-quarter 2026 S&P 500 earnings are tracking 28.4% growth, the strongest pace since late 2021, reinforcing the debate. The Federal Reserve’s next policy meeting is in June, while CME FedWatch tracks market-implied odds for later 2026 moves.
Why does Fed could raise rates in 2026 matter?
Morningstar said on May 26 that investors are asking a question that looked remote earlier this year: whether the Federal Reserve could end up raising interest rates in 2026 instead of cutting them. The shift has emerged as U.S. stocks absorb stronger-than-expected first-quarter earnings, Treasury yields stay elevated and inflation worries linger. CME’s FedWatch tool shows traders are using fed funds futures to map those changing odds, while Federal Reserve officials have kept the focus on incoming data rather than promising easier policy. FactSet said first-quarter S&P 500 earnings growth is tracking at 28.4%, the fastest pace since the fourth quarter of 2021. Why are investors talking about a 2026 hike at all? Morningstar’s May 26 markets brief said the discussion has picked up because the old script of slowing growth, cooling inflation and lower rates no longer looks assured. The report linked the question directly to firm economic activity and to earnings that have held up better than many investors expected. (morningstar.com) CME Group says FedWatch reflects probabilities implied by 30-day fed funds futures prices, and those probabilities have become a shorthand for how markets see the policy path. CNBC reported on May 12 that traders had moved away from expecting rate cuts and had begun assigning a higher probability that the next move could be a hike after a hot inflation report. (morningstar.com) What in the earnings data is feeding that view? FactSet said that with 94% of S&P 500 companies reporting, the blended year-over-year earnings growth rate for the first quarter stands at 28.4%. FactSet also said 84% of companies beat earnings-per-share estimates and 81% beat revenue estimates. Charles Schwab said on May 6 that first-quarter earnings were tracking near 28% year over year, with profit margins also improving. (cmegroup.com) That combination matters for markets because stronger profits can support equity prices and reinforce the view that corporate demand and broader nominal growth remain resilient. What has the Fed itself said? The Federal Reserve’s March 18 Summary of Economic Projections set out participants’ forecasts for growth, unemployment and inflation through 2028, but it did not commit the central bank to a preset course. (factset.com) The Fed has continued to say policy decisions depend on the incoming data and the balance of risks to inflation and employment. (schwab.com) Morningstar wrote in a separate March 2 analysis that minutes from a recent Fed meeting suggested some officials were taking a more “two-sided” approach to policy, meaning they were not treating cuts as the only possible next step. That article also said such a stance did not mean hikes were certain or imminent. Why does this matter for AI and capital spending? (federalreserve.gov) Morningstar’s May 26 brief tied the rates debate to a market already dealing with heavy spending on artificial intelligence infrastructure. If investors start to assume money will stay expensive for longer, discount rates, financing costs and return assumptions for large capital projects can all change. (morningstar.com) Nvidia’s earnings and broader AI spending have helped keep attention on how much capital the technology sector is committing to data centers and related infrastructure. In that setting, any repricing of Fed policy can affect how investors value long-duration growth bets, even when company earnings remain strong. Does this mean a rate hike is now the base case? (morningstar.com) Morningstar’s reporting does not say a 2026 hike is the central forecast. It says investors are asking the question because the assumptions behind expected cuts have weakened. CME FedWatch, which CME says should be the attribution source for rate probabilities, remains the clearest public gauge of how traders are updating those odds between Federal Open Market Committee meetings. (morningstar.com) The next Fed meeting is in June, according to the CME FedWatch page, and investors will also be watching future inflation data, labor-market reports and corporate guidance for signs that growth is either cooling or staying too firm for the Fed to ease. (cmegroup.com)
