While rate cuts were widely expected at the start of the year, the Fed is moving increasingly closer to a rate hike in 2026.

On Friday, US markets corrected sharply following the release of much stronger-than-expected employment figures, which rekindled bets on Fed rate hikes.

In May, the US economy added 172,000 jobs, significantly exceeding the consensus estimate of 85,000: Unemployment remains stable at 4.3%.

While concerns regarding the health of the labor market were high at the end of last year, this report confirms the improvement observed over the past few months. In 2025, the US economy created an average of only 15,000 jobs per month. This figure has rebounded to 114,000 over the first five months of the year.

The takeaway for the Fed: with the labor market performing well, the focus must now shift to inflation. At the beginning of the year, the Fed anticipated a gradual decline in inflation toward its 2% target. However, the war in Iran and surging energy prices have disrupted the disinflationary trend. The May CPI, which is due out tomorrow, is expected at 4.2%, which would be its highest reading since May 2023.

Over recent weeks, several Fed officials have opened the door to an interest rate hike. "If recent trends continue, it may soon be appropriate to act," Cleveland Federal Reserve President Beth Hammack stated last week.

The debate has thus shifted toward rate hikes. According to the CME FedWatch Tool, markets are now pricing in a rate hike by year-end. Meanwhile, Wall Street banks continue to largely bet on a status quo.

And yet, the Fed maintains a dovish bias. Indeed, the Fed indicates in its statement that the next move will be a rate cut. Maintaining this dovish bias at the last meeting came as a surprise to most observers. Three Fed members opposed the decision.

Given the data released in recent weeks, the Fed will likely have no choice but to abandon this dovish bias next week. This creates a delicate situation for Kevin Warsh, who will preside over his first meeting, despite having been appointed by Donald Trump to lower rates.

While the White House occupant has expressed confidence in Kevin Warsh in recent weeks, repeatedly indicating that he would not seek to interfere in these decisions, it is difficult to imagine him remaining silent if the Fed were to raise rates.

On Friday, he expressed his dissatisfaction following the release of the jobs report. "Nowadays, when you have good reports, the market goes down because they think they (the Fed) are going to raise rates," he said during an interview with NBC recorded Friday. "There is no reason to raise interest rates."

The Fed is widely expected to opt for a status quo next week. However, as inflation rises and the Fed leaves rates unchanged, monetary policy effectively becomes more accommodative.