Warsh’s Debut as Fed Chair UShers in a Hawkish Hold

• The Federal Open Market Committee (FOMC) held the policy rate steady at the target range of 3.5%-3.75% for a fourth consecutive meeting. The move was fully expected by market participants.
• The post-meeting statement was significantly pared down relative to the April release. Economic growth is still characterized as expanding at a “solid” pace despite elevated uncertainty. Job gains were seen as largely keeping pace with labor force growth – helping to hold the unemployment rate steady – while inflation is still seen as “elevated”.
• Forward guidance, which had previously included an easing bias, was removed from the statement.
• The FOMC also released a revised set of economic forecasts, known as the “Summary of Economic Projections” (SEP). The SEP represents the median of the individual forecasts submitted by each of the FOMC participants. Relative to the March update:
  • The median projection for real GDP growth – as measured on Q4/Q4 basis – was downgraded to 2.2% (previously 2.4%) in 2026 while 2027 was left unchanged at 2.3%. The long-term outlook was maintained at 2.0%.
  • The median year-end unemployment forecast for 2026 was nudged lower to 4.3% (previously 4.4%), while 2027 was unchanged at 4.3%.
  • Core PCE inflation – the Fed’s preferred inflation gauge – was revised higher to 3.3% for 2026 (previously 2.7%) and 2.5% in 2027 (previously 2.2%).
  • Lastly, the median projection for the federal funds rate was raised to 3.8% (previously 3.4%) for 2026 – suggesting the potential for a rate hike later this year. This is followed by 25 bps of easing in 2027 and 2028.
• All twelve FOMC members voted in favor of today’s decision and the move to a shorter statement.

Key Implications

• The FOMC stuck a more hawkish tone under Kevin Warsh’s debut appearance as the new Fed chair. The committee elected to drop its easing bias and raised its median forecast on the fed funds rate, with the median “dot” now suggesting the Fed’s next move could be a hike. That said, there’s quite a lot of dispersion within the dots. Nine participants still see the policy rate unchanged (or lower) by year-end, while six participants expect two or more hikes. It’s also worth noting that Chair Warsh likely did not submit an interest rate forecast, which didn’t come as a surprise given his past criticisms of the dot plot and questioning its efficacy as a communication tool.
• All eyes now turn to the press conference (scheduled for 2:30 EST), where Warsh will undoubtedly face a litany of questions regarding his vision for the Fed, whether he plans to hold a press conference after each meeting, and his plan to shrink the Fed’s $6.8 trillion of bond holdings. But most importantly, market participants will be looking for any indications of whether Warsh pushes back on the more hawkish assessment. Treasury yields rose sharply following the release, while Fed futures are now pricing in 30bps of rate hikes by year-end (up from +20bps prior to the release).