Warsh's First Move – And the Test That's Just Getting Started

• Warsh cut the official FOMC statement from 344 words to 132 words, removing all forward guidance and easing bias while launching five task forces to review Fed operations including the dot plot and press conference format
• The FOMC is deeply split on rate direction: nine officials project at least one hike this year, eight see no change, and one wants a cut, with the median year-end projection rising to 3.8% from 3.4% in March
• Core PCE inflation remains around 2.8%-3.0% (well above the Fed's 2% target) even after stripping out Iran conflict effects, while the labor market has tightened with job openings per unemployed worker rising back above 1.0

Summary

Key Decision: The Federal Reserve, under new Chairman Kevin Warsh, unanimously voted to hold interest rates at 3.5%–3.75%. However, markets sold off as Warsh delivered a more hawkish stance than anticipated.

Major Policy Changes:

• Warsh drastically shortened the official FOMC statement from 344 words to 132 words
• Eliminated forward guidance and easing bias language entirely
• Did not submit his own dot plot projection, signaling potential dismantling of this framework
• Announced five task forces to review Fed operations, including communications and the dot plot format

Dot Plot Results: The remaining 18 participants showed a divided committee—nine officials favor at least one rate hike this year, eight see no change, and one wants a cut. The median projection puts the fed funds rate at 3.8% by year-end, up from 3.4% in March.

Market Implications: Following the Iran peace deal, markets had expected dovish policy as oil prices retreated from $115/barrel. However, Warsh emphasized that core PCE inflation remains at 2.8%-3%, well above the Fed's 2% target. The Iran conflict only added 0.3 percentage points to core inflation, meaning the structural inflation problem persists.

Critical Data Points:

• Core PCE has exceeded 2% for five consecutive years
• Job openings per unemployed worker rose above 1.0
• May nonfarm payrolls added 172,000 jobs
• Market probability of at least one rate hike before year-end surged to 86% from 66%

Bottom Line: Warsh's first press conference signals a regime change in Fed communications, with a hawkish tone that disappointed markets expecting easier policy following geopolitical developments.