WASHINGTON – Kevin Warsh’s first meeting as chairman of the Federal Reserve ended Wednesday with no change in interest rates, the removal of key language indicating a bias toward future tapering, and a very brief policy statement.
The Federal Open Market Committee voted unanimously to keep its overnight lending rate centered in the 3.5%-3.75% range. The federal funds rate has held there since the central bank cut rates by three percentage points in the last quarter of 2025.
As there was speculation about Warsh taking over the reins of the central bank, the meeting followed the same pattern as others this year on rates but with a different twist.
Fed officials, using a “dotted plot” grid, removed their previous view of rate cuts this year and hinted at the possibility of a rate hike. However, speculation had missed the participation of one member, with Fed watchers suspecting that Warsh would not submit his opinion.
A note attached to the forecast material showed that 18 of the 19 participants of the meeting submitted an estimate and an economic forecast.
Because the dot plot is an unknown combination of expectations, it was not possible to determine whether it was Warsh who did not send the predictions. But Fed watchers leading up to the meeting widely expected Warsh not to participate in the SEP. Some suspect that he may try to eliminate the feature altogether. An additional dot was missing from the 2028 projections.
However, according to the responses, the average rate of the fed funds rate at the end of 2026 is now 3.8%, from 3.4% in the previous forecast from March and signing the committee sees at least one rate increase as necessary this year. Participants of the meeting were divided on rates this year, eight expected no change, one saw a reduction and nine expected at least one increase.
Warsh has been critical of the forecasting tool and other guidance from the committee including projections on unemployment, inflation and gross domestic product in the Summary of Economic Projections.
In addition to the rate call, which was widely expected in financial markets, the FOMC’s post-meeting statement not only removed previous language seen as a nod to future easing but took the hatchet from the entire post-meeting statement. Warsh criticized the Fed for overcommunicating.
This week’s information came in at just 130 words, compared to 341 in the April 29 issue following the latest meeting. The statement provided a brief summary of economic conditions followed by a pledge to control inflation.
“Economic activity is growing at a strong pace despite the high level of uncertainty in debt, in
part, in the conflicts in the Middle East. Productivity growth and capital investment are strong,” the statement read.
“Inflation remains high compared to the Committee’s two percent target, which is partly indicative
shocks that caused price increases in certain sectors, including electricity. I
The committee will bring price stability,” the committee added.
The statement also noted that the Fed will maintain its policy of “adequate reserves” in the banking system, indicating there are no immediate plans to reduce the central bank’s bonds on its $6.7 billion balance sheet, as Warsh has advocated.
The unanimous approval of the statement came after the so-called forward-looking verbiage drew three dissenters at the April meeting from regional bank presidents who wanted to preserve the two-party option to be able to increase or decrease the future.
Along with the uncertainty over rates, officials also revised their guidance on where policy is headed from here. The grid, which shows anonymously the average rate of meeting participants, erased the previous guidance of one cut this year and pushed back any cuts in 2027 and 2028 as policymakers gauge the intensity of the inflation spike brought on by the Iran war.
The grid showed an average cash rate of 3.8% by the end of the year – some 0.16 percentage points above the current rate and suggesting that an increase is very much on the table. They continued to expect a long-term interest rate of 3.1%.
Officials changed their outlook on the economy, raising their outlook for inflation in 2026 to 3.6% headline and 3.3% core, excluding food and energy. At the last update in March, committee members expected 2.7% rates for both measures. They also slightly lowered their estimate of gross domestic product growth to 2.2%, down 0.2 percentage points from March, and lowered the unemployment rate to 4.3%, down 0.1 percentage points.
Inflation has created chaos for policymakers who are trained to view short-term supply shocks as war-related increases.
The latest inflation indicators posted multi-year highs, with May’s consumer price index showing an annual inflation rate of 4.2%, although the headline measure excluding food and energy registered lower than the headline reading of 2.9%. Inflation has been above the Fed’s 2% target for the past five years.
Although he has offered little public comment outside of his confirmation hearing and his May 22 swearing in as chairman, Warsh has said that inflationary pressures in general should be taken into account when making policy. He also emphasized that artificial intelligence will ultimately have a positive impact on the economy as increased productivity will help reduce the cost of goods and services.
However, the issue of downsizing has been made more difficult by a surprisingly resilient labor market. Nonfarm payrolls growth again defied expectations in May with a gain of 172,000 while the unemployment rate, the Fed’s most watched metric, was at 4.3%, unchanged from a year ago.
Market prices are in line with the FOMC’s outlook, with no rate cuts expected in 2026 and a quarterly hike expected by the end of the year, according to CME Group’s FedWatch gauge.
