Fed Holds Rates Steady, Trims Statement, Sends Hawkish Signal

The first Federal Open Market Committee (FOMC) meeting chaired by Fed Chair Kevin Warsh concluded on Wednesday. The committee decided to keep the benchmark overnight lending rate unchanged at a range of 3.5% to 3.75%, removed key language hinting at a future easing bias, and sharply cut the length of the policy statement.

The FOMC voted unanimously to maintain rates. The federal funds rate has remained at this level since the central bank cut rates by a cumulative 0.75 percentage points in the second half of 2025.

Although the market is focused on Warsh's leadership at the Fed, the meeting followed this year's established pace on the rate decision, but showed a clear shift toward more cautious language in policy communications.

Fed officials withdrew expectations for a rate cut this year through the closely watched "dot plot" and signaled that while a rate hike is possible, it is not a done deal. The dot plot omitted a forecast from one member, and market observers suspect Warsh did not submit his projection.

A note attached to the forecast materials showed that 18 of the 19 participants submitted rate and economic forecasts. Since the dot plot is an anonymous summary of expectations, it is impossible to confirm whether the non-submitter was indeed Warsh. But before the meeting, the market widely expected Warsh not to participate in the Summary of Economic Projections (SEP).

Warsh has long criticized the dot plot as a forecasting tool, as well as other committee forward guidance, including the SEP's projections for unemployment, inflation, and gross domestic product (GDP).

Beyond the widely expected rate decision, the FOMC's post-meeting statement not only removed previously dovish language signaling a future easing bias but also substantially cut the remaining content.

This week's statement had only 130 words, compared with 341 words in the statement following the April 29 meeting. The new statement briefly summarizes economic conditions before pledging to continue controlling inflation.

The statement said that despite some uncertainty, partly related to the conflict in the Middle East, economic activity continues to expand at a solid pace. Productivity growth and capital investment are strong, job growth keeps pace with the size of the labor force, and the unemployment rate has changed little.

The committee added that inflation remains above the 2% target, partly due to supply shocks that have pushed up prices in certain sectors, including energy, and that the committee is committed to achieving price stability.

The statement also noted that the Fed will continue its policy of maintaining "ample reserves" in the banking system, meaning there are no immediate plans to reduce its holdings of bonds on its $6.7 trillion balance sheet, even though Warsh had previously advocated doing so.

At the previous meeting in April, regional reserve bank presidents had issued three dissenting votes because they wanted to retain the option of either a future rate hike or cut, opposing the so-called "forward guidance" language. This statement was passed unanimously.

Against the backdrop of uncertain rate prospects, officials also adjusted their guidance on future policy direction. The dot plot, which anonymously shows 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 whether the inflation surge triggered by the Iran war is persistent.

The dot plot showed the median forecast for the year-end federal funds rate at 3.8%, about 0.16 percentage points above the current level, indicating that a rate hike is still under consideration. Officials continued to expect the long-run federal funds rate at 3.1%.

Officials also raised their economic forecasts: the 2026 headline inflation outlook rose to 3.6%, and core inflation (excluding food and energy) rose to 3.3%. In the previous update in March, both readings were 2.7%. They also slightly lowered 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 surge in inflation has left policymakers in a dilemma, as traditional policy discipline requires them to look through short-term supply shocks, such as war-related energy price increases.

Recent inflation indicators hit multi-year highs. The May Consumer Price Index (CPI) showed an annualized inflation rate of 4.2%, although the core reading excluding food and energy was lower at 2.9%. Over the past five years, inflation has been above the Fed's 2% target.

Although Warsh made few public comments before being sworn in as chair on May 22, he has long argued that policy should generally look through supply-shock inflation. He also believes that artificial intelligence will ultimately have a deflationary effect on the economy, as productivity gains help lower the cost of goods and services.

Nevertheless, the unexpectedly strong labor market further complicates the case for a rate cut. May nonfarm payrolls again beat expectations, adding 172,000 jobs, while the unemployment rate—one of the Fed's most-watched indicators—has remained unchanged at 4.3% over the past year.

Market pricing is in line with the FOMC's expectations. According to the CME FedWatch tool, the market expects no rate cuts in 2026 and anticipates a 25-basis-point hike by year-end.