Farewell to interest rate cut fantasy: The Fed may "show its hawkish claws" this week, knocking on the door of rate hikes again.

The Federal Reserve will welcome the June FOMC meeting this week, and this decision may become a key turning point. The Fed may remove the "dovish bias" from its policy statement, making it clear that rate cuts are no longer the policy path. Currently, core inflation in the United States is accelerating, the job market is stabilizing, and the Fed may prioritize controlling inflation rather than supporting employment. In addition, market pricing and global central bank actions both indicate an increase in US bond rates, with federal funds future rates higher than the previous dot plot. The credibility of the Fed and inflation expectations are being tested, and the possibility of a hawkish shift and future rate hikes is increasing. The June FOMC meeting may see a major turning point. The Fed may remove the "dovish bias" from its policy statement, making it clear that rate cuts are no longer the predetermined path of monetary policy. Recent data shows that despite high geopolitical uncertainty, inflation is accelerating and the job market continues to improve. Since the second half of 2025, the market has been immersed in the narrative of "the Fed is about to start a rate-cutting cycle." However, entering 2026, economic data continues to disrupt this expectation. Ahead of the June FOMC meeting, the implied rate level in federal funds futures is significantly higher than the median of the March dot plot - this means that market investors believe earlier and more firmly than Fed officials themselves that rates will not fall soon, and may even rise further. At the same time, major central banks around the world have not waited for the Fed's decision. The ECB has raised rates on June 11th, and is expected to raise overnight rates again as soon as October. The Bank of Japan is reportedly expected to raise rates on June 16th. The Reserve Bank of Australia has raised rates twice since 2026. To avoid a weakening US dollar and surging long-term rates, the Fed may have to remove the dovish bias from its policy statement. Compared to March, the dot plot in the June Summary of Economic Projections (SEP) is likely to significantly tilt hawkish. The March dot plot showed a median overnight rate of 3.4%, which is likely to be revised upwards at this week's meeting, especially considering that the market has priced in higher rates: the December federal funds futures contract is trading around 3.8%. The median for 2027 (3.1%) is also likely to rise, with the current federal funds futures at 3.9%; the median for 2028 (3.1%) has been pushed by the market to 4.05%. Furthermore, the Fed may revise upward its overall and core PCE inflation forecasts, while revising downward its unemployment rate expectations, shifting its policy focus from supporting the job market to controlling inflation. Core inflation is accelerating Not only is overall inflation rising, but core inflation in the United States is also on the rise, becoming a real source of concern. The 3-month annualized and 6-month annualized rates for core CPI are 3.2% and 3.1%, respectively, much higher than the year-on-year increase of 2.9%, and the trend is worsening. The core PCE index is similarly affected - the 3-month, 6-month, and year-on-year growth rates are all visibly rising. In fact, the core PCE readings are hotter than core CPI: the 3-month and 6-month annualized rates are around 3.8%, much higher than the 2% target. This is not simply being driven by oil prices pushing overall inflation higher, as once oil prices fall, core inflation would significantly decrease. Even though the trimmed mean PCE, which excludes specific components, is currently somewhat deviating, it usually lags behind core PCE. When core inflation was rising in 2021 and declining in 2022, the trimmed mean PCE showed a lag. Therefore, it is highly likely that the trimmed mean PCE readings will rise in the coming months. Focus on supporting the job market may fade In addition, as signs of stabilization in the job market have appeared in recent months, the Fed no longer needs to focus mainly on weak employment, and can shift its attention back to inflation. As of the end of April, job openings have exceeded the number of unemployed for the first time since May 2025, with the ratio surpassing 1. At the same time, data from the Bureau of Labor Statistics (BLS), ADP, and Revelio Labs show that recruitment activities in the United States are recovering, with employment numbers steadily increasing after hitting bottom at the end of 2025. This does not mean that the Fed should aggressively raise rates, but it indicates that the Fed should start sending a signal: the rate-cutting cycle is over, and the next major policy action will be a rate hike. The new Fed Chairman, Kevin Wash, will deliver this message at the press conference, but this is a high-risk balancing act that Powell took years to master before. A dovish stance could weaken the US dollar and cause volatility in the bond market; while a hawkish stance could anger the current administration that nominated him. The credibility of the Fed and the necessity of anchoring inflation expectations are hanging in the balance. If the Fed wants to balance both, it may have no choice but to start preparing the market for "the next step is not rate cuts but rate hikes."