Fed Holds Rates, Removes Easing Bias

## Fed Holds Rates at First Meeting of Warsh Era The first meeting chaired by Kevin Warsh as Fed Chair concluded Wednesday. The decision held rates steady, removed key language hinting at a future easing bias, and significantly shortened the policy statement. The Federal Open Market Committee voted unanimously to keep the benchmark overnight lending rate in a range of 3.5% to 3.75%. The rate has been at that level since the central bank cut by 0.75 percentage points in the second half of 2025. Despite market curiosity and speculation about Warsh at the helm, the meeting followed the established pattern for rate decisions this year but differed in other respects. ## Dot Plot Pulls Back Rate Cut Expectations Fed officials pulled back rate cut expectations for this year via the closely watched "dot plot" and hinted that a rate hike is possible but not certain. However, one member's projection was missing from the dot plot, leading market watchers 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 cannot be determined if Warsh was the one who did not submit. However, market observers widely expected Warsh not to participate in the Summary of Economic Projections before the meeting. Some suspect he may try to abolish the mechanism entirely. Additionally, a dot was missing from the 2028 projections. Warsh has been critical of the dot plot tool and other committee forward guidance, including the projections for unemployment, inflation, and GDP in the SEP. ## Statement Shortened, Inflation Language Strengthened Beyond the widely expected rate decision, the FOMC's post-meeting statement not only removed the previous hint of an easing bias but also significantly cut the rest of the statement. This week's statement was only 130 words, compared to 341 words after the April 29 meeting. It offered a brief summary of economic conditions followed by a commitment to control inflation. The statement said: "Despite some degree of uncertainty, partly related to the Middle East conflict, economic activity continues to expand at a solid pace. Productivity growth and capital investment are robust. Employment growth keeps pace with the labor force, and the unemployment rate has changed little." The committee added: "Inflation remains above the committee's 2% target, partly due to supply shocks pushing up prices in certain areas, including energy. The committee is committed to achieving price stability." The statement also noted the Fed would maintain its policy of keeping "ample reserves" in the banking system, suggesting no immediate plans to shrink the central bank's $6.7 trillion balance sheet bond holdings, despite Warsh having advocated for such a move. At the previous April meeting, three dissenting votes emerged from regional bank presidents who wanted to retain the option of either raising or cutting rates in the future, opposing the so-called "forward guidance" language. This statement was approved unanimously. ## Inflation and Jobs Data Impact Future Policy With rate outlook highly uncertain, officials also adjusted their guidance on future policy. The dot plot, which anonymously shows participants' rate expectations, erased the previous expectation of one rate cut this year and delayed any possible cut to 2027 and 2028, as policymakers assess the persistence of the inflation spike driven by the Iran war. The median projection for the year-end federal funds rate was 3.8% — about 0.16 percentage points above current levels, 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 headline inflation projection to 3.6% and core inflation (excluding food and energy) to 3.3%. In the previous March update, the committee expected both measures at 2.7%. They also slightly cut GDP growth expectations to 2.2%, down 0.2 points from March, and cut the unemployment rate to 4.3%, down 0.1 points. The inflation spike puts policymakers in a dilemma, as traditional policy training calls for looking through short-term supply shocks (such as war-related energy price spikes). Recent inflation readings hit multi-year highs, with the May Consumer Price Index showing an annualized rate of 4.2%, though the core reading, excluding food and energy, was lower at 2.9%. Inflation has remained above the Fed's 2% target for the past five years. ## Market Expectations and Next Steps Although Warsh has made few public comments beyond his confirmation hearing before taking office as chair on May 22, he has long advocated looking through supply-shock type inflation when setting policy. He also insists that artificial intelligence will ultimately have a deflationary effect 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 again beat expectations, adding 172,000 jobs, while the unemployment rate — the indicator the Fed watches most closely — has held steady at 4.3% over the past year. Market pricing aligns with the FOMC's outlook. According to CME's FedWatch tool, markets expect no rate cut in 2026 and anticipate a 25-basis-point rate hike before year-end.