Fed holds rates steady, drops language suggesting future rate cuts

• The FOMC statement was dramatically shortened to 130 words from 341 words, removing forward guidance language that three regional bank presidents had dissented against in April
• Fed officials raised their 2026 inflation projections to 3.6% headline and 3.3% core, up from 2.7% in March, while the dot plot now suggests a possible rate hike to 3.8% by year-end rather than cuts
• Warsh notably did not participate in the Summary of Economic Projections (18 of 19 members submitted), consistent with his known criticism of the Fed's forecasting tools and forward guidance practices

Summary

Key Decision: The Federal Reserve, under new Chairman Kevin Warsh, held its benchmark interest rate steady at 3.5%-3.75% in a unanimous vote. Rates have been at this level since a 0.75 percentage point cut in late 2025.

Major Policy Changes:

• The FOMC removed language suggesting a bias toward future rate cuts
• The policy statement was dramatically shortened to 130 words from 341 words previously
• The "dot plot" projections now show no rate cuts expected for 2026, with a possible hike on the table instead
• Median funds rate projection of 3.8% by year-end suggests a potential increase of 0.16 percentage points

Economic Outlook:

• Inflation projections for 2026 raised significantly to 3.6% headline and 3.3% core, up from 2.7% for both measures in March
• May CPI showed 4.2% annual inflation (2.9% core), with inflation above the Fed's 2% target for five years
• GDP growth forecast lowered to 2.2% (down 0.2 points)
• Unemployment projection cut to 4.3% (down 0.1 points)
• May payrolls added 172,000 jobs

Notable Elements:

• Warsh reportedly did not participate in the dot plot submissions (18 of 19 members contributed)
• The chairman has been critical of Fed forecasting tools and forward guidance
• Supply shocks from the Middle East conflict cited as inflation driver
• No immediate plans to reduce the Fed's $6.7 trillion balance sheet
• Market pricing aligns with FOMC outlook: no 2026 cuts expected, possible quarter-point hike by year-end