Fed holds rates steady and trims statement, removing any dovish tilt
The first meeting chaired by Federal Reserve Chair Kevin Warsh ended on Wednesday. The meeting decided to leave rates unchanged and removed key language that hinted at a future rate-cut bias, while also sharply shortening the policy statement.
The Federal Open Market Committee (FOMC) voted unanimously, 12-0, to keep the benchmark overnight borrowing rate in the 3.5% to 3.75% range. The federal funds rate has remained there since the central bank cut rates by 0.75 percentage point in the second half of 2025.
Despite the curiosity and speculation surrounding Warsh's leadership, the meeting followed this year's established pattern on rates, while differing in other ways.
Through the closely watched dot plot, Fed officials withdrew expectations for a rate cut this year and signaled that hikes are possible, though not certain. However, the projection of one member 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. Because the dot plot is an anonymous summary, it is impossible to know whether the missing forecast was Warsh's. Before the meeting, market watchers widely expected Warsh not to participate in the Summary of Economic Projections (SEP). Some suspected he might try to eliminate the mechanism entirely. A dot was also missing in the 2028 forecast.
Warsh has criticized the dot plot as a forecasting tool, as well as other forms of forward guidance used by the committee, including the SEP forecasts for unemployment, inflation and GDP.
Beyond the rate decision markets expected, the FOMC post-meeting statement not only removed wording that had hinted at future easing but also dramatically shortened the rest of the statement.
This week's statement was only 130 words long, compared with 341 words after the April 29 meeting. It briefly summarized economic conditions and then pledged to keep inflation under control.
The statement said that, despite some uncertainty, economic activity continued to expand at a solid pace. Productivity growth and capital investment were strong. Job growth kept pace with the labor force and unemployment was little changed.
The committee added that inflation remained above the 2% target, partly because supply shocks pushed up prices in some areas, including energy. The committee will work to achieve price stability.
The statement also noted that the Fed will continue its policy of maintaining 'ample reserves' in the banking system, indicating there is no immediate plan to reduce the bond holdings on its $6.7 trillion balance sheet, even though Warsh had advocated such a move.
At the April meeting, regional Reserve Bank presidents opposed so-called forward guidance language because they wanted to keep flexibility for future hikes or cuts, leading to three dissenting votes. This time the statement passed unanimously.
Amid an uncertain rate outlook, officials also adjusted their guidance on future policy. The anonymous dot plot of rate expectations erased the prior forecast of one cut this year and pushed any cuts back to 2027 and 2028 as policymakers assessed how persistent the inflation spike triggered by the Iran war might be.
The dot plot showed a median year-end federal funds rate forecast of 3.8%, about 0.16 percentage point above the current level, suggesting hikes are fully on the table. Officials continued to expect the long-run federal funds rate at 3.1%.
Officials also changed their view of the economy, raising the 2026 headline inflation forecast to 3.6% and core inflation to 3.3%. In the March update, both forecasts were 2.7%. They also slightly lowered GDP growth to 2.2% and trimmed the unemployment forecast to 4.3%.
The surge in inflation has put policymakers in a bind, because standard policy training tells them to look through short-term supply shocks, such as war-related energy price spikes.
Recent inflation measures have hit multi-year highs. The May Consumer Price Index (CPI) showed an annualized inflation rate of 4.2%, although the core measure 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 almost no public comments before his confirmation hearing, aside from that appearance, he has argued that policy should generally look through supply-shock inflation. He also insists that artificial intelligence will eventually have a disinflationary effect on the economy because higher productivity will help lower the cost of goods and services.
Even so, the unexpectedly strong labor market has made the case for rate cuts more complicated. Nonfarm payrolls again beat expectations in May, adding 172,000 jobs, while the unemployment rate — the Fed's most closely watched indicator — has stayed at 4.3% over the past year.
Market pricing is aligned with the FOMC's expectations. According to CME's FedWatch tool, the market expects no cuts in 2026 and is pricing in a 25-basis-point hike by year-end.
