The new Federal Reserve Chair, Kevin Warsh, quickly stamped his personal mark on the central bank during his first Federal Open Market Committee meeting. He did so by significantly shortening the policy statement, abandoning forward guidance, and declining to submit an interest rate forecast dot plot.
The biggest surprise of the meeting came from the Summary of Economic Projections. Among the 18 officials who submitted forecasts, nine anticipate at least one interest rate hike this year, creating a 50/50 split with the other nine who expect rates to remain unchanged or be lowered.
Market reaction was distinctly hawkish: pricing for the federal funds rate at the end of 2026 rose by a total of about 20 basis points following the statement and press conference. The US dollar strengthened, and the Treasury yield curve experienced a distorted flattening.
Despite this, major institutions including Goldman Sachs, Morgan Stanley, HSBC Holdings PLC, UBS Group AG, and Deutsche Bank AG have maintained their base case forecast for unchanged interest rates this year, according to trading desk reports.
Major Banks Hold Steady on Rates, But Flag Increased Risk
Despite clear hawkish signals from the meeting, major Wall Street banks have not incorporated a rate hike into their base case scenarios.
A report from Goldman Sachs noted that the risk of a rate hike this year has increased, but the base case remains unchanged rates. The bank pointed out that if subsequent inflation data proves concerning and job growth remains robust, a majority of officials could support a hike. However, it judges that a majority of the 12 voting members still lean toward keeping rates steady. Furthermore, geopolitical developments such as a confirmed Iran deal and the reopening of the Strait of Hormuz could quickly eliminate a primary source of inflation risk, potentially rendering the current dot plot projections outdated.
A Morgan Stanley report maintained its forecast for no policy change this year, projecting rate cuts to begin in March and June of next year. However, it emphasized this is a "very close call," stating that the Fed would not cut rates if oil price pressures feed into core inflation or if the labor market tightens further.
An HSBC Holdings PLC report extended its forecast for unchanged rates through all of 2026 and 2027. It also noted that the hawkish SEP and stronger inflation language skew risks toward further short-term rate increases and suggested the US dollar may have bottomed in 2026.
A Deutsche Bank AG report observed that a Fed less reliant on forward guidance could act more flexibly, creating conditions for hikes in future meetings. However, it also noted that today's hawkish signals combined with reduced transparency could lead to a significant tightening of financial conditions, which in turn might limit the scope for near-term hikes.
Dot Plot Split Surprises with Hawkishness
The June FOMC meeting voted unanimously 12-0 to maintain the federal funds rate target range at 3.50% to 3.75%. However, the core focus was a significant hawkish shift in economic projections.
Nine officials now project a rate hike in 2026, far exceeding previous market expectations of around three. With Chair Warsh not submitting a dot plot, the 18 forecasts resulted in a 9-9 split: nine anticipate at least one hike (five of those foresee 50 basis points or more, with one expecting 75 basis points), eight expect no change, and one still projects a cut.
The upward revisions to inflation projections were also significant. The FOMC's median projection for PCE inflation at the end of 2026 jumped from 2.7% to 3.6%, while the core PCE projection rose from 2.7% to 3.3%. Deutsche Bank AG noted that nearly all officials see inflation risks as tilted to the upside. Meanwhile, the median projection for 2026 real GDP growth was slightly lowered to 2.2%, and the unemployment rate forecast edged down to 4.3%.
A Morgan Stanley report pointed out that its own forecast for 2026 core PCE inflation is 3.0%, notably below the Fed's median, which is a key reason for maintaining its no-change forecast for this year.
Warsh's Press Conference: Hawkish Tone, No Guidance
Chair Warsh's first press conference was distinctly hawkish in tone but deliberately avoided any specific policy path guidance.
On inflation, Warsh repeatedly emphasized the Fed's "capacity and commitment to achieve the 2% price stability goal" and reiterated that "inflation is a choice." According to a Deutsche Bank AG report, he mentioned "price stability" 12 times during the conference, and the policy statement's final sentence was simplified to: "The Committee will achieve price stability."
Regarding the labor market, Warsh mentioned no downside risks, stating employment data was "moving in a good direction" and that "strong productivity-driven growth is not something we worry about, it's something we welcome."
According to a UBS Group AG report, he also noted that current policy is restrictive for some sectors like housing but harder to describe as such for financial markets, attributing this "unevenness" to differences in the transmission mechanisms of interest rate tools versus balance sheet tools.
On forward guidance, Warsh clearly stated he had "abandoned forward guidance," believing "financial markets perform best when reacting to actual data, not to how the Fed will react to data."
He also revealed he did not submit a dot plot and expressed reservations about the value of the SEP framework. A UBS Group AG report noted he used the term "working group" 29 times during the press conference.
Five Working Groups Signal Systemic Policy Review
Chair Warsh announced the formation of five working groups covering: 1) Federal Reserve communication; 2) The balance sheet; 3) The use of and reliance on existing data sources; 4) Productivity and employment in a transformative age; and 5) The inflation framework.
Warsh said the groups would be launched "in the coming weeks," with most expected to conclude by year-end. Members will include Fed economists and external experts.
On communication, Warsh expressed skepticism about the SEP's value and hinted that the frequency of press conferences might be adjusted, stating, "Press conferences are useful, but when you hold them you need to have something important to say." A Morgan Stanley report noted that if the Chair himself questions the SEP process, its sustainability is in doubt, though other officials will continue submitting forecasts until the working groups conclude.
On the balance sheet, an HSBC Holdings PLC report pointed out that the policy statement language regarding reserve management purchases was changed to "at an appropriate time," signaling a more cautious stance on SOMA portfolio expansion and leaving room for future balance sheet runoff.
On the inflation framework, Warsh made clear that the Fed would not reconsider the 2% inflation target itself until it has re-established its ability to achieve it.
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