With Kevin Warsh in his first meeting at the helm of the Federal Reserve, the Federal Open Market Committee (“FOMC”) held the fed funds target rate steady at 3.50% to 3.75% in a unanimous decision. The statement, reflecting Warsh’s desire to tighten up the messaging and remove elements of forward guidance, reaffirmed the commitment to the Fed’s dual mandate, but was clearly focused on the need to deliver price stability. In fact, the statement reiterated the commitment to a 2% inflation target – a further amplification of this renewed emphasis. Additionally, the statement included a nod to AI acting as a tailwind for U.S. economic growth, stating that “productivity growth and capital investment are strong,” while acknowledging the elevated uncertainty stemming from the conflict in the Middle East.
The Fed also released its quarterly update of economic projections, which aligned with the tenor of the statement. Core PCE was penciled in at +3.3% for 2026, up from +2.7% in the March meeting, and is expected to come down only to +2.5% in 2027. Growth expectations have drifted lower, from +2.4% to +2.2% this year, likely reflecting the impact of higher energy prices on both consumers and businesses as a result of energy supply disruption. The expected unemployment rate was also ratcheted down, from 4.4% to 4.3% – an indication that the recent stabilization in the U.S. labor market appears sustainable in the minds of the FOMC. These changes translated into a more hawkish dot plot. Nine out of the eighteen respondents now expect at least one rate hike in 2026, with eight expecting no change, and only one anticipating a rate cut. This implies the median dot for 2026 shifted to 3.750% from 3.375%, and, for 2027, the median moved to 3.625%. Important to note, and consistent with previous comments, Chair Warsh did not submit projections.
During the shortened press conference, Warsh reiterated the challenge facing the Fed currently, stating, “We’ve got some work to do on the price stability front.” The unanimous vote to hold rates steady notwithstanding, Warsh admitted that a proposal was raised in the meeting to cut rates but clearly failed to gain support. In our view, the most unexpected part of the press conference was Warsh’s announcement of plans to create four task forces – perhaps in response to calls over the last 18 months for further oversight of and reform within the Fed. These task forces will focus on the following: communications, the Fed’s balance sheet, the use and reliance on existing data sources, and productivity and jobs. They could potentially be populated by parties from both in and outside the Fed.
Overall, the statement and tone of the press conference were decidedly more hawkish. While the prospect of a lasting resolution in the Middle East should ease the upward pressure on energy prices, the voting members of the FOMC appear concerned that this current bout of inflation could prove stickier than initially expected. In addition, the stronger labor market data released over the prior three months provides the Fed with the latitude to adopt a wait-and-see stance, and the announcement of the various task forces could also give Warsh time – and the buffer – he needs to balance the Trump Administration’s desire for lower rates and the Committee’s clear consternation around the path of prices.