June 26 (Reuters) - The U.S. Federal Reserve will hold its benchmark interest rate steady for the rest of this year, defying financial market pricing for two hikes, according to an even larger majority of economists polled by Reuters.
Inflation is running above 4%, the highest in more than three years and double the Fed's target, alongside solid growth and improving labour market conditions. But oil prices have fallen close to where they were in February, before the U.S.-Israeli war with Iran began.
The central bank held rates steady at 3.50% to 3.75% this month, as widely expected, but at his first press conference Fed Chair Kevin Warsh surprised many by stressing returning inflation to the 2% target as the priority with hardly any mention of the job market.
But most say the Federal Open Market Committee will prefer to keep rates where they are in coming months.
"At the moment, holding rather than hiking is the most appropriate stance. The committee is effectively split right down the middle ... there are a couple that would be swayed by this aggressive move in energy prices," said Josh Hirt, senior U.S. economist at Vanguard who previously expected a cut.
Last week's quarterly projections from the Fed, excluding Warsh who abstained, showed nine of 19 policymakers now anticipate at least one hike by end-2026.
"If we continue to get data that moves in this direction, it's going to be extremely difficult to justify not moving rates higher," Vanguard's Hirt said.
For now, over three-quarters of economists in the June 23 to 25 Reuters poll forecast the federal funds rate to remain steady for the rest of 2026, up from about 70% before the June meeting and just under half last month.
Poll medians show rates unchanged through end-2027 versus expectations for a cut just weeks ago. Nearly 40% of respondents have again raised their rate forecasts after most had already done so earlier this month.
INFLATION SURGE REMAINS A HEADACHE
A recent surge in inflation comes on top of price pressure from President Donald Trump's sweeping import tariffs. The higher cost of living is a political liability for Trump and his Republican Party ahead of November midterm elections.
Trump partly secured his 2024 election win on pledges to curb inflation. He has also repeatedly criticised Warsh’s predecessor, Jerome Powell, for not cutting rates.
"The public does not like higher interest rates but they dislike inflation even more," said Alex Pelle, senior U.S. economist at Mizuho Securities USA.
"There will always be politicians who have opinions on what the Fed should or should not be doing. But ultimately, the job is too big to let the political considerations dominate."
Fifteen forecasters, including five primary dealers, now expect at least one hike this year versus nine predicting cuts. That is the first time the number of economists expecting hikes has outnumbered those forecasting cuts since 2023.
"We had expected only three people to write down hikes heading into the (June) meeting," said Stephen Juneau, a U.S. economist at Bank of America who now expects three interest rate hikes this year. "That's a materially hawkish surprise and it does indicate the Fed's reaction function has turned."
BofA's forecast was the most aggressive in the survey. Although Citibank still forecasts two cuts this year.
Much will depend on the Fed's communication under Warsh, which looks set to become much more brief.
At June's meeting the new Fed chief signalled a shift away from forward guidance, issuing a stripped-down policy statement reminiscent of former Chair Alan Greenspan's time running the central bank and launching a broad review of Fed operations.
Some economists are already wary of sweeping changes.
"The Fed still needs forward guidance to get its message across," said BofA's Juneau.
"There are more pros than cons to maintaining some level of guidance and not going fully back to the early Greenspan years when it was much more opaque as to what the Fed was doing."
(Other stories from the Reuters global economic poll)
Reporting by Indradip Ghosh; Polling and analysis by Anant Chandak; Editing by Ross Finley and Hugh Lawson
