Markets
Fed Chair Warsh made it clear that he is here to make changes. At his first meeting as Chair, the Fed left the federal funds target range unchanged at 3.50%-3.75% in the first unanimous decision since July last year. Anything resembling forward guidance was stripped from the notably brief statement, including the easing bias that remained in April.
The statement consisted of just two short paragraphs: one addressing economic activity and employment, and another focused on inflation. The Fed noted that economic activity is expanding at a solid pace despite elevated uncertainty, while job gains have kept pace with workforce growth. Inflation remains elevated relative to the 2% target, partly reflecting supply shocks. To underline its current priority, the statement concluded with a clear message: “The Committee will deliver price stability.”
The updated Summary of Economic Projections reinforced the hawkish shift. Median PCE inflation projections for 2026-2028 were revised higher to 3.6%, 2.3% and 2.0%, from 2.7%, 2.2% and 2.0% previously. Core PCE forecasts were also raised to 3.3%, 2.5% and 2.1%, from 2.7%, 2.2% and 2.0%. All but one Fed official judged inflation risks to be skewed to the upside and uncertainty to be greater than in March.
At the same time, GDP growth is expected to remain slightly above trend, while unemployment is projected to stay close to its estimated long-run equilibrium rate of around 4.2%. The updated dot plot showed that nine of eighteen policymakers now favor at least one rate hike before year-end, while only one still projects a rate cut. Looking further ahead, eight officials expect policy rates to remain above current levels by the end of 2027.
Warsh declined to submit his own dot-plot projections, reiterating his opposition to this form of forward guidance. During the press conference, he outlined what may become a defining theme of his tenure:
“I think financial markets perform best when they react to incoming data. I think financial markets work less efficiently when they ask the question, ‘How will the Federal Reserve react to that incoming information?'”
The message was clear: trade the data, not the Fed. Warsh revealed that “Fed communications” is one of five task forces he has established to review central bank practices. Areas under consideration include reducing public appearances, revising the SEP framework and reassessing the role of forward guidance. Additional task forces will examine balance-sheet policy, the inflation framework, productivity and employment dynamics, and the use of real-time data. Warsh argued that real-time information often provides more value than traditional survey-based indicators, which suffer from long lags and declining response rates.
Markets took note of the changing tone at the Fed. The US yield curve bear steepened, with front-end yields rising as much as 13.2 bps. The 2-year Treasury yield climbed to 4.20% for the first time since February 2025, while money markets now fully price a Fed rate hike by October.
Inflation releases will be scrutinized closely over coming months. Risks remain skewed to the upside, raising the possibility of further hawkish repricing toward September or even July tightening expectations.
The dollar benefited from renewed rate support, with EUR/USD falling from above 1.1600 to briefly below 1.1500. The US economic outperformance narrative relative to Europe is now reinforced by the prospect of Fed tightening from a position of strength, potentially opening the way for a retest of the August 2025 low at 1.1392.
The combination of higher US real yields and a more hawkish Fed also poses a challenge for risk assets. Major US equity indices fell between 1.0% and 1.35% during the session as investors adjusted to the prospect of tighter financial conditions.
News & Views
The Brazilian central bank (BCB) cut its policy rate by 25 bps to 14.25% despite rising inflation expectations, which currently stand at 5.3% for this year and 4.1% for next year.
The BCB simultaneously revised higher its inflation forecasts. Headline inflation is now projected at 5.2% this year, up from 4.6%, and 3.7% at end-2027, compared with 3.5% previously. The central bank’s inflation target remains 3.0%, with a tolerance band of ±1.5 percentage points.
Policymakers acknowledged that risks to inflation remain elevated on both sides. Nevertheless, the central bank justified the rate cut by arguing that monetary policy must also support economic stability and employment conditions.
In its statement, the BCB said:
“Without compromising its fundamental objective of ensuring price stability, this decision also implies smoothing economic fluctuations and fostering full employment.”
The central bank further indicated that projected inflation at the next relevant policy horizon, which will be formally published at the next meeting, is expected to fall below target, providing room for a gradual easing cycle despite the current inflation backdrop.
