Fed keeps rates unchanged and drops easing bias; Warsh debut sends a stronger hawkish signal
Kevin Warsh’s first meeting as Fed chair ended on Wednesday. The committee kept rates unchanged and removed key wording that had suggested a future tilt toward cuts, while sharply trimming the policy statement.
The Federal Open Market Committee (FOMC) voted unanimously to keep the benchmark overnight borrowing rate in the 3.5% to 3.75% range. The federal funds rate has stayed at that level since the central bank cut it by 0.75 percentage points in the second half of 2025.
Although markets are curious about Warsh at the helm of the central bank, this meeting continued this year’s pattern on rates, but showed clear changes in policy language and forward guidance.
Fed officials, through the closely watched dot plot, pulled back expectations for rate cuts this year and signaled that a hike is possible, though not certain. At the same time, one member’s forecast was missing from the dot plot, leading market watchers to suspect Warsh did not submit his projection.
A note attached to the forecast materials said 18 of the 19 participants submitted rate and economic forecasts. Because the dot plot is an anonymous aggregation, it is impossible to confirm whether the missing forecast was indeed Warsh’s. But before the meeting, market watchers widely expected Warsh would not take part in the Summary of Economic Projections (SEP). Some suspected he might try to eliminate the mechanism altogether. In addition, one dot was also missing from the 2028 forecast.
Warsh has long criticized the dot plot as a forecasting tool, along with other forms of forward guidance used by the committee, including the SEP’s forecasts for unemployment, inflation and gross domestic product (GDP).
Beyond the rate decision broadly expected by markets, the FOMC’s post-meeting statement not only removed language implying a future bias toward easier policy, but also cut much of the rest of the statement.
This week’s statement was just 130 words, compared with 341 words after the April 29 meeting. It offered only a brief summary of economic conditions before pledging to keep inflation under control.
The statement said: “Despite a degree of uncertainty, partly due to conflict in the Middle East, economic activity continues to expand at a solid pace. Productivity growth and capital investment have been strong. Job gains have kept pace with the labor force, and the unemployment rate has changed little.”
The committee added: “Inflation remains above the Committee’s 2% target, partly because supply shocks have driven up prices in some areas, including energy. The Committee is committed to achieving price stability.”
The statement also said the Fed will maintain its policy of keeping “ample reserves” in the banking system, indicating there is no immediate plan to shrink its $6.7 trillion balance sheet of bond holdings, despite Warsh’s support for doing so.
Previously, at the April meeting, regional reserve bank presidents had opposed the so-called “forward guidance” wording because they wanted to preserve room to raise or cut rates later, resulting in three dissenting votes. This time, the statement passed unanimously.
Amid uncertainty over the rate outlook, officials also adjusted their guidance on the future policy path. The anonymous dot plot of participants’ rate expectations erased the prior forecast of one cut this year and pushed any cuts out to 2027 and 2028, as policymakers assess how persistent the war-driven inflation spike is likely to be.
The dot plot showed a median year-end federal funds rate forecast of 3.8% — about 0.16 percentage points above the current level — indicating that a hike is fully on the table. Officials still see the long-run federal funds rate at 3.1%.
Officials also revised their economic view, lifting the 2026 headline inflation forecast to 3.6% and core inflation, which excludes food and energy, to 3.3%. In March, the committee had forecast both measures at 2.7%. They also trimmed GDP growth expectations to 2.2%, down 0.2 percentage points from March, and lowered the unemployment rate forecast to 4.3%, down 0.1 percentage point.
The inflation spike has put policymakers in a bind, as traditional policy training tells them to look through short-term supply shocks such as war-related energy price increases.
Recent inflation readings have hit multi-year highs, with May’s Consumer Price Index (CPI) showing an annualized inflation rate of 4.2%, even though the core reading excluding food and energy was lower at 2.9%. Over the past five years, inflation has remained above the Fed’s 2% target.
Although Warsh made few public comments outside his confirmation hearing before taking the oath as chair on May 22, he has argued that policymakers should generally look through supply-shock inflation. He has also insisted that artificial intelligence will ultimately have a disinflationary effect on the economy because higher productivity will help lower the cost of goods and services.
Even so, an unexpectedly strong labor market has made the case for cuts more complicated. Nonfarm payrolls again beat expectations in May, rising by 172,000, while the unemployment rate — the Fed’s most closely watched indicator — has held at 4.3% over the past year.
Market pricing matched the FOMC’s expectations. According to CME’s FedWatch tool, markets expect no rate cuts in 2026 and are pricing in a 25-basis-point hike before year-end.
