The U.S. Federal Reserve kept interest rates unchanged at 3.50% to 3.75% in the first policy meeting chaired by Kevin Warsh. However, the central bank signaled a more hawkish outlook as inflation remains above its 2% target, partly due to higher oil prices following the Iran conflict.
New quarterly projections showed that 9 of the Fed’s 19 policymakers now expect at least one rate hike before the end of 2026. Three months ago, none of the officials projected higher rates, highlighting a major shift in the Fed’s outlook.
Warsh did not submit his own interest rate forecast to the Fed’s dot plot, arguing that too much attention is paid to these projections. He said markets should focus more on economic data than on policymakers’ forecasts.
In a significant policy change, the Fed removed all forward guidance from its statement. The new, shorter statement only announced the rate decision and reaffirmed the Fed’s commitment to maintaining ample reserves in the banking system.
Warsh repeatedly refused to provide guidance on future rate moves, saying the Fed will assess incoming data before its next meeting in six weeks. He stressed that no Fed official currently supports an immediate rate hike despite the more hawkish projections.
The new Fed chair also announced five task forces to review key areas of central bank operations, including communications, the balance sheet, data usage, productivity and employment trends, and the inflation framework. Recommendations are expected later this year and could lead to changes in the dot plot and economic projections process.
Warsh said the U.S. labor market remains stable and that recent employment trends have generally been positive. He also described artificial intelligence as one of the most important economic developments of his lifetime, offering both major opportunities and risks.
Financial markets reacted negatively to the Fed’s hawkish tone. Treasury yields rose sharply, with the 2 year yield reaching its highest level since February 2025. U.S. stocks fell, with the Dow down 0.97%, the S&P 500 down 1.2%, and the Nasdaq down 1.3%, as investors increased expectations of a Fed rate hike later this year.
Fed Signals Higher-for-Longer Rates, Debate on September Hike
Goldman Sachs Vice Chairman Kaplan said the Fed may need to raise rates as early as September if inflation does not cool. He noted that rate hikes usually come in a series, meaning a September increase could be followed by one or two more. Markets turned more hawkish after Fed Chair Kevin Warsh reaffirmed the focus on fighting inflation, pushing short-term Treasury yields higher. Nearly half of Fed officials now expect rate hikes before year-end.
However, JPMorgan Asset Management strategist Xu Changtai believes the Fed is likely to keep rates unchanged this year. He said policymakers are showing patience despite removing the easing bias from their statement. While the Fed’s message initially lifted Treasury yields and pressured equities, Xu expects the central bank to continue balancing inflation control and employment goals under its current framework.
