Fed leaves rates unchanged and drops easing bias as dot plot turns hawkish
Kevin Warsh's first meeting as Fed chair ended Wednesday. The Fed kept rates unchanged, removed key language suggesting a tilt toward cuts, and sharply shortened its policy statement.
The Federal Open Market Committee (FOMC) voted unanimously to keep the benchmark overnight lending rate in the 3.5% to 3.75% range. The rate has been held there since the central bank cut it by 0.75 percentage point in the second half of 2025.
Although markets are full of curiosity and speculation about Warsh's leadership, this 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 rate cuts this year and suggested that a hike is possible, though not certain. However, one official's forecast was missing from the dot plot, and market watchers suspect Warsh did not submit his own projection.
A note attached to the forecast materials showed that 18 of the 19 participants submitted rate and economic projections. Because the dot plot is an anonymous aggregate, it cannot be confirmed whether the missing forecast was indeed Warsh's. But before the meeting, market watchers widely expected Warsh would not take part in the Summary of Economic Projections (SEP). Some suspected he might try to eliminate the mechanism entirely. A point was also missing from the 2028 forecast.
Warsh has long criticized the dot plot as a forecasting tool, along with other forms of forward guidance used by the committee, including the SEP's forecasts for unemployment, inflation and GDP.
In addition to the widely expected rate decision, the FOMC's post-meeting statement not only removed wording that had previously hinted at a future easing bias, but also cut much of the rest of the statement.
This week's statement was only 130 words, compared with 341 words after the April 29 meeting. It offered a brief summary of the economy and then promised to keep fighting inflation.
The statement said: “Despite some uncertainty, partly due to conflict in the Middle East, economic activity has continued to expand at a solid pace. Productivity growth and capital investment have been strong. Job gains have remained in line with growth in the labor force, and the unemployment rate has changed little.”
The committee added: “Inflation remains somewhat elevated relative to the Committee's 2 percent objective, in part reflecting price increases in some areas, including energy, driven by supply shocks. The Committee is committed to achieving price stability.”
The statement also said the Fed will maintain its policy of keeping “ample reserves” in the banking system, suggesting there is no immediate plan to shrink bond holdings in the central bank's $6.7 trillion balance sheet, despite Warsh's support for doing so.
At the April meeting, regional reserve bank presidents objected to the so-called forward guidance language because they wanted to preserve room to move either up or down on future rates, resulting in three dissents. This statement passed unanimously.
Amid uncertainty about the rate outlook, officials also adjusted guidance on future policy. The anonymously plotted dot chart of participants' rate expectations erased the earlier forecast for one cut this year and pushed any cuts out to 2027 and 2028 as policymakers assessed the persistence of the inflation spike sparked by the Iran war.
The dot plot showed a median year-end federal funds rate forecast of 3.8% — about 0.16 percentage point above current levels, suggesting a hike is firmly on the table. Officials continued to see the long-run federal funds rate at 3.1%.
Officials changed their view of the economy, lifting their 2026 headline inflation forecast to 3.6% and their core inflation forecast, which excludes food and energy, to 3.3%. In March, the two forecasts were both 2.7%. They also nudged down the GDP growth forecast to 2.2%, 0.2 percentage point lower than in March, and lowered the unemployment rate forecast to 4.3%, down 0.1 point.
The inflation surge has put policymakers in a bind, because traditional policy training tells them to look through short-lived supply shocks such as war-related energy price spikes.
Recent inflation readings have hit multi-year highs. The May consumer price index showed annual inflation of 4.2%, although the core reading excluding food and energy was lower at 2.9%. Over the past five years, inflation has stayed above the Fed's 2% target.
Although Warsh made almost no public comments before his confirmation hearing and sworn-in date as chair on May 22, he has argued that policymakers should normally look through supply-shock inflation. He has also insisted that artificial intelligence will eventually have a disinflationary effect on the economy because higher productivity will help lower the cost of goods and services.
Still, an unexpectedly strong labor market has made the case for cuts more complicated. Nonfarm payrolls again beat expectations in May, rising by 172,000, while the unemployment rate, the Fed's most closely watched indicator, has stayed unchanged at 4.3% over the past year.
Market pricing matched the FOMC's view. According to CME's FedWatch tool, markets expect no cuts in 2026 and are pricing in a 25-basis-point hike before year-end.
