Fed holds rates steady, pares down statement to remove cutting bias

• The Fed's 'dot plot' projections now show no rate cuts expected in 2026 and a median funds rate of 3.8% by year-end, suggesting a hike is likely on the table
• Warsh notably did not submit economic projections (18 of 19 participants submitted), reflecting his known criticism of the forecasting tool and forward guidance practices
• Inflation projections for 2026 were raised sharply to 3.6% headline and 3.3% core, up from 2.7% in March, driven partly by energy price spikes from the Middle East conflict

Summary

The Federal Reserve held its benchmark interest rate steady at 3.5%-3.75% in new Chairman Kevin Warsh's first meeting, while significantly altering its communication approach. The FOMC voted unanimously to maintain rates, which have been unchanged since a 75-basis-point cut in late 2025.

Key Changes:

• The policy statement was dramatically shortened to 130 words from 341 words previously, removing language suggesting a bias toward future rate cuts
• The "dot plot" projections eliminated expectations for a 2026 rate cut and now indicate a possible hike, with the median year-end funds rate at 3.8%
• Only 18 of 19 participants submitted projections; Fed watchers suspect Warsh declined to participate, consistent with his criticism of the forecasting tool

Economic Projections:

• 2026 inflation outlook raised to 3.6% headline and 3.3% core (from 2.7% in March)
• GDP growth lowered to 2.2% (down 0.2 percentage points)
• Unemployment projection reduced to 4.3% (down 0.1 percentage points)
• May CPI showed 4.2% annual inflation rate; core at 2.9%

Market Context:

Inflation has remained above the Fed's 2% target for five years, driven partly by energy price increases from Middle East conflict. The labor market remains resilient with 172,000 May payroll gains and 4.3% unemployment. Market pricing aligns with Fed expectations, anticipating no 2026 cuts and a possible quarter-point hike by year-end.

The Fed will maintain "ample reserves" in its $6.7 trillion balance sheet, indicating no immediate quantitative tightening plans.