Fed Holds Rates Steady and Removes Easing Bias, Dot Plot Turns Hawkish
Kevin Warsh's first meeting as Fed chair concluded Wednesday. The committee decided to hold rates steady and removed key language hinting at a future easing bias, while significantly shortening the 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 unchanged. The fed funds rate has stayed at that level since the central bank cut rates by 0.75 percentage points in the second half of 2025.
Despite market curiosity and speculation about Warsh leading the central bank, the meeting followed the established pattern for rate decisions this year, but differed in other respects.
Fed officials withdrew their expectation for rate cuts this year through the closely watched "dot plot" and hinted that rate hikes are possible but not certain. However, one member's forecast was missing from the dot plot, and market observers suspected Warsh did not submit his projection.
A note attached to the projection materials showed that 18 of 19 participants submitted rate and economic forecasts. Since the dot plot is an anonymous summary of expectations, it cannot be confirmed whether the missing submission was Warsh's. But before the meeting, market observers widely expected Warsh not to participate in the Summary of Economic Projections (SEP). Some suspected he might try to scrap the mechanism entirely. Additionally, a dot was missing from the 2028 forecast.
Warsh has been critical of the dot plot tool and other forward guidance from the committee, including SEP forecasts for unemployment, inflation, and GDP.
Besides the widely expected rate decision, the FOMC's post-meeting statement not only removed the previous language hinting at future easing but also significantly cut the rest of the statement.
This week's statement was only 130 words, while the statement after the April 29 meeting was 341 words. The statement gave a brief summary of the economy, then a pledge to control inflation.
The statement said: "Economic activity expanded at a solid pace despite some degree of uncertainty partly due to the Middle East conflict. Productivity growth and capital investment were strong. Employment growth kept pace with the labor force size, and the unemployment rate changed little."
The committee added: "Inflation remains above the committee's 2% target, partly due to supply shocks pushing up prices in some areas including energy. The committee is committed to achieving price stability."
The statement also noted the Fed will maintain its policy of keeping "ample reserves" in the banking system, indicating no immediate plans to shrink the central bank's $6.7 trillion balance sheet holdings, despite Warsh having advocated for it.
Previously, at the April meeting, three regional bank presidents dissented because they wanted to keep the option of either raising or lowering rates in the future, objecting to so-called "forward guidance" language. This statement passed unanimously.
Amid uncertainty about the rate outlook, officials also adjusted their guidance on future policy direction. The dot plot, which anonymously shows participants' interest rate expectations, erased the previous expectation for one rate cut this year and pushed any potential cuts to 2027 and 2028 as policymakers assess the persistence of an inflation spike driven by the Iran war.
The dot plot showed the median forecast for the year-end federal funds rate was 3.8%, about 0.16 percentage points above the current level, indicating a rate hike is fully on the table. Officials continued to see the long-run fed funds rate at 3.1%.
Officials changed their view of the economy, raising their 2026 headline inflation forecast to 3.6% and core inflation (excluding food and energy) to 3.3%. In the last update in March, committee members had expected 2.7% for both measures. They also lowered their GDP growth forecast slightly to 2.2%, down 0.2 percentage point from March, and lowered the unemployment rate forecast to 4.3%, down 0.1 percentage point.
The inflation spike has put policymakers in a bind, as traditional policy training calls for looking through short-term supply shocks such as war-related energy price spikes.
Recent inflation indicators hit multi-year highs, with the May CPI showing an annualized rate of 4.2%, though the core reading excluding food and energy was lower at 2.9%. Inflation has been above the Fed's 2% target for the past five years.
Although Warsh has made few public comments beyond his confirmation hearing before being sworn in as chair on May 22, he has argued that supply-shock inflation should generally be looked through when setting policy. He also maintains that AI will ultimately be disinflationary for the economy, as productivity gains help lower the cost of goods and services.
Nevertheless, a surprisingly strong labor market has complicated the case for rate cuts. Nonfarm payrolls for May beat expectations again, adding 172,000 jobs, while the unemployment rate, the Fed's most closely watched indicator, has held steady at 4.3% for the past year.
Market pricing aligns with the FOMC's outlook. According to CME's FedWatch tool, markets expect no rate cut in 2026 and price in a 25-basis-point rate hike before year-end.
