Fed Chair Walsh's debut: Downplays dot plot, sticks to 2% inflation target

At 2:00 a.m. Beijing time on June 18, the Fed announced it would keep the federal funds rate target range unchanged at 3.5% to 3.75%, marking the fourth consecutive hold this year, in line with broad market expectations.

The post-meeting statement said inflation remains elevated, the Fed will continue to work toward price stability, while maintaining its assessment of economic growth as "solid" and noting strong productivity growth and capital investment. Compared with previous releases, this policy statement was more concise, seen as a signal of new Chair Walsh's push for communication reform.

Policymakers made several adjustments to the economic projections released in March: the median forecast for this year's inflation rate was raised from 2.7% to 3.6%, and the 2026 core inflation forecast was raised from 2.7% to 3.3%. Meanwhile, the median forecast for 2026 economic growth was lowered from 2.4% to 2.2%, and the 2026 year-end unemployment rate forecast was lowered from 4.4% to 4.3%.

Following his first policy meeting as chair, Walsh pledged to restore price stability. Earlier, Fed officials held rates steady and signaled support for a rate hike this year.

At the press conference, Walsh said persistently high prices are a burden on Americans, but the past does not necessarily determine the future, and the FOMC is committed to achieving price stability. He also downplayed the importance of the latest rate projections, saying officials are not very confident in their forecasts and the economic outlook remains highly uncertain.

The dot plot showed that among 19 officials, 9 expect at least one rate hike this year, including 6 who expect at least two hikes; another 9 expect rates to remain unchanged or to be cut. Walsh himself said he declined to submit a rate projection.

Among the 18 officials who submitted dot plot projections, 1 believed the Fed should cumulatively hike by 75 basis points for the remainder of 2026, 5 believed by 50 basis points, 3 believed by 25 basis points, 8 believed rates should stay unchanged, and 1 believed by a cumulative 25-basis-point cut.

Communication framework revamp: Ditching forward guidance, downplaying dot plot

Walsh focused his press conference on communication reform. He made clear the Fed has abandoned forward guidance, saying the tool is no longer suitable for the current situation, and noted that the dot plot is not helpful for policy implementation and the FOMC does not consider itself bound by rate projections.

He also said press conferences remain a useful communication method but future adjustments would be valuable; it would not be surprising if a new communication framework were released before year-end.

Inflation target and response: Sticking to the 2% floor

Walsh emphasized that the 2% inflation target is the Fed's long-term goal, and there is no reason to reassess it until it is achieved. The Fed will continue to address the persistent deviation of inflation from its target and guard against second-round price effects.

He noted that the Fed cannot have a significant impact on supply shocks such as energy, and its core task is to prevent inflation from spreading further through wages and expectations. He also mentioned that most of the data the Fed currently relies on comes from outdated survey methods, an area that needs reform.

Institutional reform: Establishing five special task forces

To address current challenges, Walsh announced the formation of five special task forces on monetary policy, expecting most of their work to be completed by year-end.

The communication task force will advise on adjustments to the Summary of Economic Projections (SEP); the balance sheet task force will assess appropriate reserve duties; the data source task force will address data lags; the productivity task force will specifically examine the impact of AI on productivity; and the employment task force will focus on labor market dynamics.

Additionally, an inflation task force will specifically examine the drivers of inflation.

Independence and external relations

Walsh stressed that the Fed will never cede decision-making power to any outsider. He said he has had three breakfasts with U.S. Treasury Secretary Bessent and also met with the Fed's inspector general, who will release a report on the renovation of the Fed building this summer.

He also said market reactions to real-time data are usually the most effective, and market prices themselves may be the most important reference information.

Market reaction: Stocks, currencies, and bonds move in tandem

U.S. stocks fell on Wednesday, with the Dow dropping about 500 points, technology heavyweights leading losses, and Treasury yields surging. Investors faced rising uncertainty about the monetary policy path following hawkish signals from Fed officials.

At the close, the Dow fell 507.12 points, or 0.98%, to 51,492.55; the Nasdaq fell 354.68 points, or 1.34%, to 26,021.65; and the S&P 500 fell 91.25 points, or 1.21%, to 7,420.

The dollar index posted its biggest gain in three months. USD/JPY rose 0.14% to 160.65 yen, with the yen hitting its weakest level since July 2024, potentially triggering Japanese intervention; GBP/USD fell 0.99% to $1.3293, and EUR/USD fell 0.92% to $1.1501.

In U.S. bond markets, short-term Treasury prices dropped sharply, with the yield curve steeply flattening. The 2-year Treasury yield rose as much as 15 basis points to 4.20%, its highest since February 2025.

Oil prices recovered slightly after two days of steep declines, with WTI crude rising 1% to settle below $77 per barrel and Brent crude settling below $80 per barrel. The market continued to watch a possible interim agreement between the U.S. and Iran.

Institutional views: Clear hawkish signal

Christopher Hodge, chief U.S. economist for North America at Natixis, said the meeting was an overall hawkish move: rates held steady, the easing bias was removed, no dissenting votes, the statement was more concise, and it ended with a commitment to achieving price stability.

Kay Haigh, an analyst at Goldman Sachs Asset Management, said the Fed's recent hawkish shift was not only driven by energy prices but also by strong labor market and inflation data. His baseline remains that the Fed can barely avoid a rate hike, but future inflation data will carry significant weight.

Nick Timiraos, the "Fed whisperer," noted the dot plot showed a clear hawkish tilt, and the policy statement was comprehensively revised from start to finish, significantly shortened in length, which may force a repricing of market expectations for the rate path.