Fed holds rates, removes easing bias, dot plot turns hawkish
The first meeting chaired by Kevin Warsh as Fed Chair ended Wednesday. The committee held rates unchanged, removed key language hinting at future easing, and sharply trimmed the policy statement length.
The FOMC voted unanimously to keep the benchmark overnight lending rate at 3.5%-3.75%. The federal funds rate has held at this level since the central bank cut rates by 75 bps in H2 2025.
Despite market curiosity and speculation over Warsh's leadership, the meeting followed this year's pattern on the rate decision but differed otherwise.
Fed officials withdrew expectations for a rate cut this year via the closely watched dot plot, and hinted that a rate hike, while not certain, is possible. However, one member's projection was missing from the dot plot, leading market observers to suspect Warsh did not submit his forecast.
A note attached to the projections showed 18 of 19 participants submitted rate and economic forecasts. Since the dot plot is an anonymous summary, it is impossible to confirm whether the missing projection was Warsh's. But before the meeting, observers widely expected Warsh not to participate in the SEP. Some suspected he might try to scrap the mechanism entirely. A dot was also missing from the 2028 forecast.
Warsh has long criticized the dot plot and other FOMC forward guidance, including the SEP's forecasts for unemployment, inflation, and GDP.
Beyond the widely expected rate decision, the post-meeting statement not only removed language implying a future easing bias but also sharply trimmed the rest of the statement.
This week's statement was just 130 words, compared to 341 words after the last meeting on April 29. It gave a brief summary of economic conditions and then pledged to control inflation.
The statement said: "Despite a degree of uncertainty, partly attributable to the Middle East conflict, economic activity has been expanding at a solid pace. Productivity growth and capital investment are robust. Job gains have kept pace with labor force growth, and the unemployment rate has moved 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 price stability."
The statement also noted the Fed will maintain its policy of keeping "ample reserves" in the banking system, indicating no immediate plans to shrink the central bank's $6.7 trillion balance sheet bond holdings, despite Warsh's advocacy for such a move.
Previously, at the April meeting, three regional bank presidents dissented over the so-called forward guidance language, preferring to keep both rate hike and cut options open. This statement passed unanimously.
Amid uncertainty over the rate outlook, officials also adjusted their guidance on future policy direction. The dot plot, which anonymously displays 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 driven by the Iran war.
The dot plot showed the median year-end federal funds rate forecast at 3.8% — roughly 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 2026 headline inflation to 3.6% and core inflation (excluding food and energy) to 3.3%. In the March update, committee members had expected 2.7% for both. They also lowered GDP growth slightly to 2.2%, down 0.2 percentage point from March, and cut the unemployment rate forecast to 4.3%, down 0.1 point.
The inflation surge puts policymakers in a dilemma, as traditional policy training tells them to look through short-term supply shocks, such as war-related energy price spikes.
Recent inflation indicators hit multi-year highs, with the May CPI showing an annualized rate of 4.2%, though the core measure excluding food and energy was lower at 2.9%. Inflation has exceeded the Fed's 2% target for five years.
Although Warsh has made few public comments outside his confirmation hearing before being sworn in as chair on May 22, he has long argued that policymakers should generally look through supply-shock inflation when setting policy. He has also insisted that AI will ultimately have a deflationary impact on the economy, as productivity gains help lower the cost of goods and services.
Nevertheless, the 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 metric — has held steady at 4.3% over the past year.
Market pricing aligns with FOMC expectations. According to CME's FedWatch tool, markets expect no rate cut in 2026 and anticipate a 25-bp rate hike by year-end.
