Fed Keeps Rates Steady, Drops Rate-Cut Bias and Signals Possible Hike

WASHINGTON — Kevin Warsh’s first meeting as Federal Reserve chairman ended Wednesday with policymakers holding interest rates steady and leaving the door open to a possible increase. The committee also removed language that had suggested a bias toward future cuts, while issuing a notably shorter policy statement.

The Federal Open Market Committee voted unanimously to keep its benchmark overnight borrowing rate in a range of 3.5% to 3.75%. The federal funds rate has remained at that level since the central bank reduced rates by three-quarters of a percentage point in late 2025.

While Warsh’s arrival at the Fed drew significant attention, the rate decision largely followed the same pattern as previous meetings this year. The bigger changes came in the committee’s projections and its pared-back statement.

One fewer dot on the chart

Fed officials removed their previous expectation for a rate cut this year and now indicate that a hike could be on the table. But the summary of economic projections was missing one participant: Warsh.

Warsh has previously criticized the Fed’s “dot plot” and other forms of forward guidance, including projections for unemployment, inflation and gross domestic product in the SEP.

Many Fed watchers had expected Warsh not to submit his own forecast, with some speculating that he might seek to eliminate the feature altogether. At a news conference after the decision, he confirmed that he had declined to provide a projection and said he is forming task forces to review major Fed operations.

“I did not submit a dot for me,” Warsh said. “It’s not helpful in the conduct of policy. I suspect by year-end, as I mentioned in my opening statements, there’ll be a review about communication broadly, press conferences, dots, meetings, and the like, transcripts, minutes. This will be part of that. I don’t want to prejudge the outcomes there, but I’m pretty open-minded about what they could be.”

Based on 18 of 19 possible responses, the median estimate for the federal funds rate at the end of 2026 is now 3.8%, up from 3.4% in the March projections. That suggests the committee sees at least one rate increase as necessary this year. Participants were divided on the likely path, with eight expecting no change, one forecasting a cut and nine anticipating at least one hike.

Another dot was absent from the projections for 2028.

A leaner policy statement

During the news conference, Warsh addressed the committee’s revised statement.

“It’s a bit shorter, a bit simpler and it dispenses with some older language,” he said. “That statement just gives you the facts, as best we can judge it.”

In addition to the widely expected decision to hold rates steady, the FOMC removed language that had been interpreted as a signal of future easing and cut the rest of the statement sharply. Warsh has criticized the Fed for overcommunicating.

This week’s statement came in at 130 words, compared with 341 words in the April 29 release after the previous meeting. It offered only a brief assessment of economic conditions and a renewed commitment to controlling inflation.

“Economic activity is expanding at a solid pace despite elevated uncertainty that owes, in part, to the conflict in the Middle East. Productivity growth and capital investment are strong,” the statement said. “Job gains have kept pace with the workforce, and the unemployment rate has changed little.”

“Inflation remains elevated relative to the Committee’s 2 percent goal, in part reflecting supply shocks that have driven price increases in certain sectors, including energy. The Committee will deliver price stability,” policymakers said.

The statement also said the Fed would continue maintaining “ample reserves” in the banking system, suggesting there are no immediate plans to reduce the central bank’s bond holdings on its $6.7 trillion balance sheet, an area Warsh has advocated changing.

The unanimous vote followed the April meeting, when three regional Fed bank presidents dissented over forward-guidance language they believed should have preserved a two-sided outlook for either rate hikes or cuts.

Inflation outlook revised higher

Alongside the shift in its rate guidance, the Fed also adjusted its economic forecasts. The dot plot removed an earlier projection for one cut this year and pushed possible reductions into 2027 and 2028 as officials assess whether inflation pressures tied to the Iran war will persist.

The median projection for the federal funds rate at the end of the year rose to 3.8%, about 0.16 percentage point above the current level, indicating that a rate hike remains a serious possibility. Officials still expect the long-run funds rate to settle at 3.1%.

The Fed raised its inflation forecasts for 2026 to 3.6% for headline inflation and 3.3% for core inflation, which excludes food and energy. In March, officials had projected 2.7% for both measures. The committee also slightly lowered its forecast for GDP growth to 2.2%, down 0.2 percentage point from March, and reduced its unemployment projection to 4.3%, down 0.1 percentage point.

The inflation jump has created a challenge for policymakers, who are typically trained to look through temporary supply shocks such as the energy price increase linked to the war.

Recent inflation readings have reached multiyear highs. The consumer price index for May showed a 4.2% annual inflation rate, while the core measure, excluding food and energy, came in lower at 2.9%. Inflation has remained above the Fed’s 2% target for five years.

Warsh told reporters that the Fed remains committed to bringing inflation back to 2%.

“The commitment to deliver is strong, unanimous, and unambiguous, and that’s I think an important message we’ve missed for five years, and we’re going to fix that,” Warsh said.

Although he has made few public remarks since his confirmation hearing and swearing-in on May 22, Warsh has argued that supply-shock inflation should generally be looked through when setting policy. He has also maintained that artificial intelligence is likely to have a disinflationary effect over time by boosting productivity and helping ease the cost of goods and services.

Even so, the case for cutting rates has become more complicated because of a resilient labor market. Nonfarm payrolls rose by 172,000 in May, surpassing expectations, while the unemployment rate stood at 4.3%, unchanged over the past year.

Before the decision, markets were not pricing in any rate cuts in 2026 and expected a quarter-point hike by year-end, according to the CME Group’s FedWatch tool. After the decision and Warsh’s comments, traders began pricing in the possibility of a cut as early as October.

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