Fed Holds Rates, Drops Easing Bias, Signals Hawkish Stance
The first meeting chaired by Fed Chair Kevin Warsh ended Wednesday with a decision to hold rates steady, removal of key language suggesting a future bias toward rate cuts, and a significantly shortened policy statement.
The Federal Open Market Committee (FOMC) voted unanimously to keep the benchmark overnight lending rate at 3.5% to 3.75%. The rate has remained at this level since the central bank cut rates by 0.75 percentage points in the second half of 2025.
Although the market was curious about Warsh's leadership, the meeting continued the established pattern on rates but differed in other aspects.
Fed officials, through the closely watched "dot plot," withdrew expectations for rate cuts this year and hinted that rate hikes are possible but not certain. However, one member's forecast was missing from the dot plot, leading market observers to suspect Warsh did not submit his forecast.
A note attached to the projections showed that 18 of the 19 participants submitted rate and economic forecasts. Since the dot plot is an anonymous summary of projections, it is impossible to confirm if the missing forecast was indeed Warsh's. But before the meeting, observers widely expected Warsh would not participate in the Summary of Economic Projections (SEP). Some suspected he might try to abolish the tool altogether. Additionally, one dot was missing from the 2028 projections.
Warsh has long criticized the dot plot and other forward guidance tools, including the SEP's forecasts for unemployment, inflation, and GDP.
In addition to the widely expected rate decision, the post-meeting statement not only removed language hinting at a future bias toward easing but also significantly trimmed the rest of the statement.
This week's statement was only 130 words, compared to 341 words after the April 29 meeting. It provided a brief summary of economic conditions followed by a commitment to control inflation.
The statement said: "Despite some uncertainty (partly due to the Middle East conflict), economic activity has been expanding at a solid pace. Productivity growth and capital investment have been strong. Employment growth has kept pace with labor force growth, and the unemployment rate has changed little."
The committee added: "Inflation remains above the committee's 2% target, partly due to supply shocks that have boosted prices in some sectors, including energy. The committee is committed to achieving price stability."
The statement also noted that the Fed will maintain its policy of "ample reserves" in the banking system, indicating no immediate plans to shrink its $6.7 trillion balance sheet bond holdings, although Warsh has advocated for such a move.
At the April meeting, three regional bank presidents dissented because they wanted to preserve the option for future rate hikes or cuts by opposing the so-called forward guidance language. This statement passed unanimously.
Amid uncertainty about the rate outlook, officials also adjusted guidance on future policy direction. The dot plot, which anonymously shows participants' rate expectations, erased the previous expectation of one rate cut this year and pushed any possible cut to 2027 and 2028, as policymakers assess the persistence of inflation triggered by the Iran war.
The dot plot showed the median year-end federal funds rate forecast at 3.8%—about 0.16 percentage points above the current level, indicating a rate hike is fully under consideration. Officials continued to expect the long-run federal funds rate at 3.1%.
Officials revised their economic outlook, raising the 2026 overall inflation forecast to 3.6% and core inflation (excluding food and energy) to 3.3%. In the March update, both were at 2.7%. They also slightly lowered GDP growth to 2.2%, down 0.2 percentage points from March, and lowered the unemployment rate forecast to 4.3%, down 0.1 percentage points.
The inflation surge has put policymakers in a dilemma, as traditional policy training requires them to look through short-term supply shocks, such as war-related energy price spikes.
Recent inflation indicators hit multi-year highs. May CPI showed annualized inflation at 4.2%, though core CPI (ex-food and energy) was lower at 2.9%. Inflation has remained above the Fed's 2% target for five years.
Although Warsh has made few public comments outside his confirmation hearing before taking office on May 22, he has long advocated looking through supply-shock inflation when setting policy. He also maintains that AI will eventually have a deflationary impact on the economy, as productivity gains help lower the cost of goods and services.
Nevertheless, a surprisingly strong labor market complicates the case for rate cuts. May nonfarm payrolls beat expectations again, adding 172,000 jobs, while the unemployment rate—the Fed's most closely watched indicator—has remained unchanged at 4.3% over the past year.
Market pricing aligns with the FOMC outlook. According to the CME FedWatch tool, markets expect no rate cuts in 2026 and anticipate a 25-basis-point rate hike by year-end.
