US interest rate discussion: cut rates first or raise them first? Barclays sees the Fed holding steady until 2027

Federal Reserve held steady for the fourth consecutive meeting in June, keeping rates at 3.50% to 3.75%, but the meeting minutes rarely revealed a hawkish tone, with officials sharply raising their year-end inflation forecasts. Barclays' baseline scenario still expects the Fed to hold until 2027, but it explicitly states that risks are tilted toward a rate hike, citing the AI investment boom pushing up prices.

(Previous context: Powell's FOMC warns of upside inflation risks, "Fed has not ruled out a rate hike," Fitch still predicts a June cut) (Background: Former Fed Chair Warsh: Crypto has integrated into the financial system! Opposes CBDC issuance, views BTC as new gold)

Table of Contents

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• Hawkish undertones hidden in meeting minutes
• AI transforms from cost-saving tool to inflation suspect
• Barclays bets on the rate hike side

Key Takeaways

• Fed held rates steady for the fourth straight time in June, keeping at 3.50%-3.75%.
• Meeting minutes revealed that 9 out of 18 officials expect at least one rate hike by year-end.
• Barclays' baseline sees Fed holding steady until 2027, but explicitly says risks tilt toward a rate hike.

While Wall Street is still guessing when the Fed will cut rates, inside the Fed's own meeting room, some have already started seriously discussing whether to raise rates. This is not baseless speculation, but a divergence written in black and white in the latest meeting minutes, and the driver pushing the issue to the forefront is not traditional oil prices or employment data — it's AI.

Based on the Fed's FOMC meeting minutes and Barclays research reports. The Fed's current benchmark rate stands at 3.50% to 3.75%. The June 2026 meeting (June 16-17) was the fourth consecutive hold, with a unanimous decision. The next meeting is scheduled for July 28-29, and market expectations generally lean toward another hold, but no one dares to take the rate hike option off the table.

This June meeting was also the first FOMC meeting chaired by new Fed Chair Kevin Warsh. Appointed by Trump and confirmed by the Senate in May 2026, Kevin Warsh immediately stopped submitting personal economic forecasts and even sought to end "forward guidance" (the Fed's practice of signaling future policy direction in advance). The post-meeting statement was also much shorter than during Jerome Powell's era. By removing personal forecasts and cutting down the statement, Kevin Warsh’s intent is clear: talk less and leave the guessing space to the market itself.

Hawkish undertones hidden in meeting minutes

The Fed's June meeting minutes showed that officials' concerns about inflation are intensifying, with a minority even believing there are reasons to raise rates now, but they chose to hold steady for the time being. The committee raised its PCE inflation forecast for end-2026 from 2.7% in March to 3.6%, and core PCE from 2.7% to 3.3%, both far above the 2% target.

The minutes pointed to three sources of inflation risk: AI-related demand, Middle East conflict, and tariffs. Most officials said that if these scenarios materialize, further tightening (i.e., rate hikes) may be needed. The minutes essentially stated that nearly all these officials indicated that some degree of policy tightening might be required to bring inflation back to 2%.

The dot plot showed even more direct divergence: among 18 officials, 9 expect at least one rate hike by year-end, with 6 of them expecting at least two hikes, while the other 9 believe rates should stay on hold or be cut. It's essentially a 50-50 split; the Fed no longer has a unified inclination toward rate cuts. Six months ago, the market was betting on when the cut would come; now, the Fed itself is betting on whether a hike will come — the script has completely flipped.

AI transforms from cost-saving tool to inflation suspect

The AI construction boom is driving up a series of costs: computing power, electricity prices, semiconductor and memory chips (then passed on to PC prices), trucking freight, building materials — all moving upward together. The logic is simple: strong AI investment is pushing economic growth above potential output, demand remains robust, and the cost of key components is not coming down, making inflation harder to retreat.

This is the most interesting twist in the entire story. AI was originally packaged as a savior that boosts productivity and lowers costs. But as the Fed sees it, AI has become a troublemaker for inflation. The tech industry talks about a productivity revolution; the Fed first sees higher electricity bills. Both sides see the same AI, but tell completely different stories.

Barclays bets on the rate hike side

In its report, Barclays' baseline expectation is that the Fed will keep rates unchanged until the end of 2027. However, Barclays strategists believe risks are tilted toward a rate hike, citing the latest FOMC meeting minutes highlighting participants' growing concerns about inflation and the risk of persistently high inflation.

Barclays strategists said verbatim: "Although participants expect inflation to recede, they believe the risk of persistently high inflation remains, partly due to strong demand related to artificial intelligence investment." Barclays also noted that participants remain divided on the future policy direction. The firm had previously abandoned its forecast for a rate cut this year.

For risk assets like Bitcoin, low rates have always been a breeding ground, while rising rate hike expectations are the opposite. An environment of higher-for-longer rates, or even a potential actual hike, puts pressure on risk assets, not support.

In March, the market was still betting on a June cut; Fitch even predicted a June cut at the time. But not only did June not bring a cut, the meeting minutes discussed rate hikes. After waiting for a cut for most of the year, what emerged was a set of minutes seriously discussing a rate hike. No one likely placed a bet on such a plot twist at the start of the year.

FAQ

Will the Fed raise rates in 2026?

Possibly. The Fed's June meeting minutes showed that 9 out of 18 officials expect at least one rate hike by year-end, with 6 expecting two or more, primarily due to inflation risks.

Why is AI making the Fed worry about inflation?

The AI boom is driving up costs for computing power, electricity, semiconductor chips, and building materials. Demand exceeds output, and officials raised their core PCE forecast for end-2026 from 2.7% to 3.3%.