Fed Holds Rates Steady, Drops Easing Bias from Statement

The Federal Open Market Committee voted unanimously at its first meeting chaired by Kevin Warsh to hold the benchmark overnight borrowing rate at 3.5% to 3.75% and removed key language hinting at future rate cuts.

Since the central bank cut rates by 0.75 percentage points in the second half of 2025, the federal funds rate has remained at this level. While the market focused on Warsh's leadership, the rate decision followed this year's established pattern, but the policy language and forward guidance clearly tightened.

Through the closely watched 'dot plot,' Fed officials withdrew expectations for a rate cut this year and signaled that a rate hike, while possible, is not certain. However, one member's forecast was missing, leading market observers to suspect Warsh did not submit his projection. A note attached to the projection materials indicated that 18 of 19 participants submitted rate and economic forecasts.

Since the dot plot is an anonymous summary of expectations, it is impossible to confirm whether the missing projection was indeed Warsh's. But ahead of the meeting, the market generally expected Warsh would not participate in the Summary of Economic Projections, and some even suspected he might try to eliminate the mechanism. One dot was also missing from the 2028 forecast.

Warsh has long criticized the dot plot and other forward guidance tools, including projections for unemployment, inflation, and GDP in the SEP. Apart from the rate decision, the FOMC post-meeting statement was also significantly shortened, at just 130 words, compared to 341 words after the April 29 meeting.

The statement provided a brief summary of economic conditions and then committed to controlling inflation. It said that despite some uncertainty, partly due to the Middle East conflict, economic activity is expanding at a steady pace, productivity growth and capital investment are strong, employment growth is keeping pace with the labor force, and the unemployment rate is little changed.

The committee added that inflation remains above the 2% target, partly due to supply shocks that have pushed up prices in certain areas, including energy, and the committee is committed to achieving price stability. The statement also noted that the Fed will maintain a policy of 'ample reserves' in the banking system, indicating no immediate plans to reduce bond holdings from its $6.7 trillion balance sheet.

At the April meeting, regional bank presidents had opposed the forward guidance language to preserve the option of either raising or cutting rates, resulting in three dissenting votes. The latest statement was unanimous.

Amid uncertainty about the rate outlook, officials also adjusted their guidance on future policy. The dot plot, which anonymously displays participants' rate expectations, erased the earlier expectation of one rate cut this year and delayed any possible cut to 2027 and 2028, as policymakers assess the persistence of inflation fueled by the Iran war.

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

At the same time, officials raised their inflation forecasts, boosting the 2026 overall inflation forecast to 3.6% and core inflation forecast to 3.3%; both were 2.7% in the March update. They also slightly lowered the GDP growth forecast to 2.2% and the unemployment rate forecast to 4.3%.

Soaring inflation has left policymakers in a dilemma. Traditional policy logic calls for looking through short-term supply shocks, such as war-related energy price spikes. However, recent inflation indicators hit multi-year highs, with the May CPI showing annualized inflation of 4.2% and core inflation excluding food and energy at 2.9%, after five years of inflation above the Fed's 2% target.

Although Warsh has made few public comments beyond his confirmation hearing before being sworn in on May 22, he has long argued that policy should generally look through supply-shock-driven inflation and that AI will ultimately have a deflationary effect on the economy as productivity gains lower the cost of goods and services.

However, the surprisingly strong labor market further complicates the case for rate cuts. May nonfarm payrolls exceeded expectations again, adding 172,000 jobs, while the unemployment rate, which the Fed watches most closely, has remained at 4.3% over the past year.

Market pricing aligned with the FOMC expectations. According to the CME FedWatch Tool, markets expect no rate cuts in 2026 and anticipate a 25-basis-point rate hike before year-end.