The Federal Open Market Committee (FOMC), led by new Chair Kevin Warsh, maintained the target range for the federal funds rate at 3.5% to 3.75%. This decision marks Warsh's first policy review since succeeding Jerome Powell. The committee noted solid economic activity despite Middle East conflict-related uncertainty, strong productivity growth, and a stable unemployment rate.
However, the FOMC indicated a significant shift in its outlook. The Summary of Economic Projections revealed that 18 out of 19 officials anticipate at least one rate increase before the end of the year, a stark contrast to earlier expectations for rate cuts. The Fed also revised its inflation forecast upward, with the Personal Consumption Expenditures (PCE) price index now projected to reach 3.6% by the end of 2026, up from a 2.7% estimate in March. Inflation is currently at a three-year high and isn't expected to return to the 2% target before 2028.
This hawkish turn comes despite persistent calls from President Donald Trump for lower interest rates. Warsh had pledged the Fed would remain "strictly independent." Analysts noted that the narrative has shifted from contemplating rate cuts to considering potential hikes, largely due to surging inflation, partly fueled by energy price shocks from the Middle East conflict, and a relatively healthy job market. One policymaker projected a rate cut this year, a decrease from 12 in March.
Mark Zandi, chief economist at Moody's Analytics, commented that "The Fed is stuck between surging inflation, which argues for rate hikes, and a soft job market, which argues for cuts, thus no change." Wall Street had already priced in a potential rate hike, with yields on two-year Treasuries climbing above 4%. The Fed's statement is expected to drop language suggesting future rate cuts, adopting a more neutral stance.
The meeting signals a challenging environment for Warsh, who took office with inflation at a three-year high. While the immediate decision was to hold rates steady, the updated projections clearly indicate a leaning towards tighter monetary policy in response to persistent inflationary pressures.
