Fed holds rates steady, strips cut bias under Warsh
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- FOMC kept the federal funds rate at 3.5%-3.75% unanimously, the level it has held since the Fed cut 75 basis points in late 2025, and its post-meeting statement shrank to 130 words from 341 in April.
- Dot plot erased the prior 2026 cut projection, with the median end-of-year rate rising to 3.8% from 3.4% in March; officials split 8-1-9 between no change, a cut, and at least one hike.
- Warsh declined to submit an individual dot-plot forecast, calling it unhelpful for policy, and said he will form task forces to review Fed communications — press conferences, dots, minutes — by year-end.
- Statement stripped out language that had hinted at an easing bias, and cited 'the conflict in the Middle East' as a contributor to elevated uncertainty, while reaffirming an 'ample reserves' policy with no immediate balance-sheet runoff.
- Inflation projections for 2026 surged to 3.6% headline and 3.3% core from 2.7% for both in March, and the statement noted inflation 'remains elevated relative to the Committee's 2 percent goal' — with May CPI at a multiyear-high 4.2% annually.
- Markets repriced after the meeting: CME Group's FedWatch tool showed traders now anticipating a possible rate hike as early as October, reversing pre-meeting expectations of no 2026 cuts.
Why it matters: Warsh's debut rewrote the Fed's communication playbook — a 60% shorter statement, a missing dot, and a hike-suggesting median — and the jump in the 2026 inflation forecast from 2.7% to 3.6% quantifies how much the Middle East energy shock has reset the rate path. Borrowers, mortgage markets, and Treasury traders now face a central bank tilting hawkish with one of its core forecasting tools effectively sidelined on day one.
