Fed Chair Walsh's Debut: Downplaying Forward Guidance and Dot Plot

## Fed Holds Steady, Walsh Debut Signals New Policy Direction At 2:00 a.m. Beijing time on June 18, the Fed announced it would keep the federal funds rate target range unchanged at 3.5% to 3.75%, the fourth consecutive hold, in line with market expectations. The post-meeting statement said officials still see inflation as elevated and reaffirmed their commitment to price stability while describing economic growth as "solid." They also noted strong productivity growth and capital investment. The statement was shorter than previous ones, which many see as a potential change in Fed communication. Policymakers also adjusted the March economic projections: the median inflation forecast for this year was raised from 2.7% to 3.6%, and the 2026 core inflation forecast from 2.7% to 3.3%; meanwhile, the 2026 growth forecast was cut from 2.4% to 2.2%, and the year-end 2026 unemployment rate forecast from 4.4% to 4.3%. ## Walsh Downplays Forward Guidance and Dot Plot After his first policy meeting as Fed chair, Kevin Walsh said the Fed will restore price stability. Officials held rates steady and signaled support for rate hikes this year. In a press conference, Walsh said: "Persistently high prices are a burden on Americans, but the past does not necessarily determine the future. Officials are clear and united; the FOMC is committed to price stability." He also downplayed the importance of colleagues' latest rate projections. The dot plot showed 9 of 19 officials expect at least one rate hike this year, with 6 expecting at least two; another 9 expect rates to remain unchanged or be cut. Walsh said other officials were not highly confident in their projections, with many acknowledging high economic uncertainty. Asked about rate debate at the meeting, he described it as a "healthy internal debate." The new chair, a longtime critic of forward guidance, said he personally declined to submit a rate forecast. ## Dot Plot Divergence Widens, Statement Streamlined The Fed's dot plot showed 18 of 19 officials submitted projections. Among them: - 1 official favored a cumulative 75 bp hike for the rest of 2026 - 5 officials favored a cumulative 50 bp hike - 3 officials favored a cumulative 25 bp hike - 8 officials favored holding rates steady - 1 official favored a cumulative 25 bp cut Meanwhile, the Fed's policy statement underwent significant revisions from start to finish, with noticeably shorter length, further reinforcing market views of a shift in communication framework. ## Key Takeaways from Fed Chair Walsh's First Press Conference ### 1. Communication Framework Overhaul: Abandon Forward Guidance, Downplay Dot Plot - Walsh made clear the Fed has abandoned forward guidance, deeming the tool no longer suitable for current conditions. - He said providing the dot plot has limited policy usefulness, and the FOMC does not consider itself bound by rate projections. - He himself did not provide a dot plot forecast at this meeting. - He believes press conferences remain useful, but adjusting their format in the future would be valuable. - It would not be surprising if a new communication framework is disclosed by year-end. ### 2. Inflation Target and Response: Hold the 2% Line - The 2% inflation target remains the Fed's long-term goal; there is no reason to reassess it until it is achieved. - The Fed is committed to addressing the five-year inflation overshoot. - On supply shocks like energy, the Fed cannot significantly affect specific prices; the core task is to prevent "second-round price effects." - Walsh noted that most data the Fed relies on come from outdated surveys, an area needing reform. ### 3. Institutional Reform: Establish Five Task Forces To address current challenges, Walsh announced five monetary policy task forces, expected to complete most work by year-end: - Communications Task Force: Advise on adjustments to the Summary of Economic Projections (SEP) - Balance Sheet Task Force: Evaluate appropriate reserve responsibilities - Data Sources Task Force: Address data lag issues - Productivity Task Force: Specifically review AI's impact on productivity - Employment Task Force: Focus on labor market dynamics Additionally, an inflation task force will examine inflation drivers. ### 4. Independence and External Relations - Walsh stressed that the Fed will never cede decision-making to any outsider. - He disclosed having breakfast three times so far with Treasury Secretary Bessent. - He also said he has met with the Fed's inspector general, who will report this summer on the building renovation. - On market pricing, he said markets generally react most efficiently to real-time data, and market prices themselves may be the most important reference. ## Market Reaction: Stocks, Dollar, and Treasuries Move in Tandem ### US Stocks Fall, Dow Drops About 500 Points On June 18, US stocks fell Wednesday, with the Dow dropping about 500 points. Tech heavyweights led declines amid a surge in Treasury yields. Several Fed officials suggested possible rate hikes this year to curb inflation, creating uncertainty about the policy path. - Dow fell 507.12 points, or 0.98%, to 51,492.55 - Nasdaq fell 354.68 points, or 1.34%, to 26,021.65 - S&P 500 fell 91.25 points, or 1.21%, to 7,420 ### Oil Edges Up but Still Pressured After two days of steep losses, oil edged higher Wednesday, but the impending interim peace deal between the US and Iran continued to weigh on prices. The deal could reopen the Strait of Hormuz and bring millions of barrels back to market. - WTI crude rose 1%, settling below $77 a barrel - Brent crude settled below $80 a barrel - President Trump said the deal could be signed as early as Thursday ### Dollar Posts Biggest Gain in Three Months The dollar index posted its largest gain in three months. The Fed held rates steady, but the dot plot showed 9 of 19 officials expect at least a 25 bp rate hike this year. - USD/JPY rose 0.14% to 160.65 - GBP/USD fell 0.99% to 1.3293 - EUR/USD fell 0.92% to 1.1501 ### Short-end Treasuries Tumble, Yield Curve Flattens Short-term US Treasury prices fell sharply Wednesday, sharply flattening the yield curve, after Fed Chair Kevin Walsh's first policy meeting saw policymakers adjust the outlook in a hawkish manner while keeping rates unchanged. - 2-year yield rose as much as 15 bps to 4.20% - That was the highest since February 2025 - Mid-curve yields rose less; long-end yields were little changed ## Institutional Views: Hiking Expectations Rise ### Natixis Christopher Hodge, chief US economist for North America at Natixis, said the meeting was overall hawkish: rates held, easing bias removed, no dissents. The statement was also significantly streamlined and stressed the commitment to price stability. ### Goldman Sachs Kay Haigh, an analyst at Goldman Sachs Asset Management, said the rate decision confirms the Fed's recent hawkish shift is not solely about energy prices. Even with oil retreating, half of FOMC members still expected rate hikes as early as this year, reflecting strong labor market and inflation data. The base case remains that the Fed can barely avoid rate hikes, but the path is narrow, giving future inflation data high weight. ### Fed Mouthpiece Nick Timiraos, the "Fed mouthpiece," commented that the dot plot was clearly hawkish. Of 18 officials, 9 expected at least one rate hike this year, with 6 seeing multiple hikes. Meanwhile, the policy statement was comprehensively revised and noticeably shorter, signaling a significant shift in communication framework. Market expectations for the rate path may be recalibrated.