The Federal Open Market Committee, in Kevin Warsh’s first meeting as chair, held its policy rate in a range between 3.5% and 3.75% on Wednesday as the Federal Reserve faced an economy where hiring has stabilized and inflation has accelerated.
The Fed’s preferred inflation metric, the personal consumption expenditures index, rose to 3.8% in April and we see it reaching 4.1% in the May report.
The upward pressure will prompt the central bank to consider a rate hike in the near term to keep inflation expectations in check and restore price stability over the next few years.
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The inflation data strongly suggests that Warsh’s honeymoon ended before it begins. While we think that the July FOMC meeting will be a status quo event, the September meeting will be a live policy meeting where the committee, depending on the data, could see movement toward a rate hike if not an outright increase.
Because of the recent surge in inflation, the FOMC removed the easing bias from policy statement, which is now considerably shorter. Gone is the sentence, “In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks.”
While the statement removes near-term guidance, our reading of the Fed’s shift is anything but neutral. Unless the inflation data eases in the near term, a rate hike may be on the way.
In addition, the radical reworking of the policy statement and the removal of forward guidance capture the change in leadership and preferences of the Fed under Warsh.
But the fact that a dot plot was produced—Warsh is likely the one dot that is missing—also suggests that forward guidance is not dead at the Fed and that the new chairman does not have the support of the majority to make the changes he wants with respect to transparency and changing the balance sheet.
The changes in the statement and the fact that nine of the 18 members in their dot plot submissions seemed to support a rate hike this year suggest that a majority on the FOMC is forming to support a focus on price stability.
Fed officials see a median rate of 3.8% at the end of 2026 and 3.6% in 2027. The policy statement reaffirmed an ample reserves policy for the banking system—meaning no near-term changes to balance sheet policy—and the committee unanimously supported the policy decision.
No matter how one measures inflation—whether it is with PCE, core PCE, the consumer price index, core CPI, the producer price index, and core PPI—all stand above the current federal funds rate and well above the Fed’s 2% inflation target.
Such increases can no longer be conveniently dismissed by the “new inflationistas” that have become quite vocal over the past few months.
Given that inflation has floated above target for over five years there is a growing risk to price stability around investors and the public resetting their inflation expectations higher, which we think is why the primary takeaway from the statement, Summary of Economic Projections and the dot plot interest rate forecast is a hawkish hold.
The economic and supply shocks that have occurred over the past several years, not to mention the boom in capital expenditures, strongly implies a real risk to price stability of looking through the current supply shock that is causing inflation to increase.
Summary of Economic Projections
The SEP contained a downward revision to its 2026 GDP projection to 2.2% from 2.4%, the 2027 forecast remained at 2.3% and the 2028 forecast was revised higher to 2.2% from 2.1%. Long-run growth remained at 2%.
The unemployment rate forecast was revised down to 4.3% from 4.4% in 2026 and was unchanged at 4.3% in 2027 and 4.2% in 2028. The long-run forecast remained at 4.2%.
The major changes in the SEP were in the inflation forecast. The Fed lifted its PCE inflation forecast to 3.6% from 2.7% in 2026, raised it to 2.3% from 2.2% in 2027, and kept it at 2% in 2028. The long-term PCE estimate remained at 2%.
The forecast of core PCE inflation was lifted to 3.3% from 2.7% for this year, 2.5% from 2.2% in 2027, and 2.1% from 2% in 2028
The federal funds projection now stands at 3.8% versus 3.4% previously for 2026, 3.6% in 2027 and 3.4% in 2028. The long-run federal funds rate remained unchanged at 3.1%.
Warsh’s press conference
The major takeaway from Warsh’s first press conference was the announcement of several task forces to examine the Fed’s communications, its balance sheet, productivity and artificial intelligence, its use of existing data and the Fed’s inflation framework.
Warsh stated that “we’ve dropped forward guidance in the statement,” but the publication of the dot plots and the interpretation of what those modal forecasts mean is very much a form of forward guidance.
Warsh will be tested further by markets that may push rates higher along the maturity spectrum in the coming days and weeks.
Warsh’s focus on price stability underscored the hawkish nature of the meeting.
While he demurred on how he intends to achieve price stability—he took cover under the changes that may come from the five new task forces he is creating—there was no sense of any dovish move toward a rate cut.
One gets the sense that we got a glimpse of Warsh’s inner hawk, which, based on his statements over the past three decades, is his true North Star.
The language around unanimous and unambiguous was intended to leave no doubt around an end to the easing bias and what I am interpreting as anything but neutral.
We are far more likely to get a rate hike than a rate cut out of a modestly less transparent Federal Reserve.
Given that he campaigned for the job promising rate cuts, this meeting may prove disappointing to those who appointed him.
The takeaway
The FOMC policy decision leaned in a hawkish direction because of the recent surge in inflation, which has created the possibility of a near-term rate hike.
While we do not expect the July meeting to be a “live meeting,” we would anticipate that by September the committee will have far more knowledge on risks around the inflation outlook, and that a rate hike at that meeting will be in play.
