Fed Holds Rates Steady, Drops Easing Bias

The first meeting chaired by Kevin Warsh as Fed chair ended with the FOMC deciding to hold rates steady and dropping key wording that previously hinted at future rate cuts, while the policy statement was significantly streamlined.

The FOMC voted unanimously to keep the benchmark overnight lending rate in the range of 3.5% to 3.75%. The fed funds rate has remained at this level since the central bank cut rates by a total of 0.75 percentage points in the second half of 2025.

This meeting followed the established pattern on rate decisions this year, but showed clear changes in policy wording and forward guidance. Fed officials withdrew expectations of a rate cut this year via the dot plot and hinted that rate hikes remain possible.

Notes attached to the projections showed that 18 of the 19 participants submitted rate and economic forecasts. Since the dot plot is anonymous, it is unclear if the missing forecaster is indeed Warsh, but market observers widely expected he would not participate in the SEP.

Warsh has long criticized the dot plot and the forward guidance tools in the SEP regarding unemployment, inflation, and GDP.

The post-meeting statement was only 130 words, sharply reduced from 341 words after the April 29 meeting. The statement first briefly summarized economic conditions, then reiterated the Fed's commitment to controlling inflation.

The statement said that despite some uncertainty, partly due to the Middle East conflict, economic activity is expanding at a solid pace. Productivity growth and capital investment are strong, employment growth is keeping pace with labor force growth, and the unemployment rate has changed little.

The committee also said inflation remains above the 2% target, partly due to supply shocks pushing up prices in some areas including energy, and the Fed is committed to achieving price stability.

The statement also noted that the Fed will maintain "ample reserves" in the banking system, meaning there are no immediate plans to reduce its $6.7 trillion balance sheet holdings of bonds, though Warsh has previously advocated for that.

At the April meeting, regional bank presidents had opposed forward guidance wording to keep options open for future rate hikes or cuts, resulting in three dissenting votes. This statement passed unanimously.

With the rate outlook still uncertain, officials also adjusted their views on the future policy path. The dot plot erased the previous expectation of one rate cut this year and pushed any possible rate cuts to 2027 and 2028.

The dot plot showed the median year-end fed funds rate forecast at 3.8%, about 0.16 percentage points above the current level, indicating rate hikes are under consideration. Officials still see the long-run fed funds rate at 3.1%.

On the economic front, officials raised the 2026 headline inflation forecast to 3.6% and the core inflation forecast to 3.3%; both were 2.7% in March. They also slightly downgraded the GDP growth forecast to 2.2% and lowered the unemployment rate forecast to 4.3%.

Recent inflation indicators hit multi-year highs, with the May CPI showing annualized inflation at 4.2% and core CPI at 2.9%. Inflation has remained above the Fed's 2% target for the past five years.

Although Warsh has made few public comments since his confirmation hearing, he has consistently advocated looking through supply-shock inflation when setting policy and believes AI may eventually have a deflationary effect as productivity gains help lower the cost of goods and services.

However, the surprisingly strong labor market complicates the case for rate cuts. May nonfarm payrolls increased 172,000, and the unemployment rate has held steady at 4.3% for the past year.

Market pricing is broadly in line with the FOMC outlook. According to the CME FedWatch Tool, the market expects no rate cuts in 2026 and prices in a 25-basis-point rate hike by year-end.