The Federal Reserve, in its first meeting led by new Chair Kevin Warsh, held interest rates steady at a benchmark range of 3.50% to 3.75%. This decision was widely anticipated by most observers, including market futures which assigned a zero percent probability to a rate cut or hike today. The move defies calls from President Trump for a rate cut, though he stated he would give Warsh time to act.
Despite the current hold, there is growing sentiment among Fed policymakers leaning towards future rate hikes. An analysis by Deutsche Bank-using a large language model to evaluate speeches from Federal Open Market Committee (FOMC) members since April-found 11 members to be hawkish, five neutral, and only one dovish. Most have grown more hawkish since the May meeting, indicating increasing concern that rate hikes may be needed. This hawkish lean is partly attributed to inflation remaining well above the Fed's 2% target, at 3.8% in April, and a relatively low unemployment rate of 4.3%.
The FOMC also released its "dot plot" projections for interest rates, inflation, unemployment, and GDP growth. These projections are expected to show that officials, at the median, no longer foresee a rate cut this year, but rather rates remaining stable in the current 3.50%-3.75% range, with some officials likely penciling in a rate increase. Market participants are currently pricing in a 60% probability of a quarter percentage point hike by the final FOMC meeting of the year in December. Analysts like David Mericle of Goldman Sachs suggest that a long pause could lead the FOMC to conclude the federal funds rate is already at an appropriate level if the economy performs well, but rate cuts are unlikely until at least mid-2027 if inflation persists above 3% for the year.
Warsh's first press conference as chairman followed the rate decision. While he has previously advocated for reducing interest rates, his initial stance as chair appears to reflect the Committee's concerns about inflation. Warsh has also indicated a desire to reduce the level of public communication from the central bank and, in line with his reform-oriented agenda, has called for scrapping the "dot-plot" entirely, though analysts expect this change to be gradual and not implemented immediately. His commentary on the need to be cautious about elevated inflation signals a departure from previous guidance, and has already caused bond markets to reprice rate-cut expectations further out to late summer or fall 2027.
