Fed Holds Rates Steady, Removes Easing Bias; Dot Plot Turns Cautious
The Federal Reserve, under the first meeting chaired by new Chair Kevin Warsh, decided to hold interest rates steady while removing key language hinting at future easing bias and significantly shortening the policy statement.
The Federal Open Market Committee (FOMC) voted unanimously to keep the benchmark overnight lending rate in a range of 3.5% to 3.75%. The rate has remained at that level since the central bank cut by 0.75 percentage points in the second half of 2025.
Despite market speculation about Warsh taking the helm, the meeting followed this year's established pattern on the rate decision, but saw clear changes in other areas.
Fed officials, through the closely watched 'dot plot', withdrew expectations for rate cuts this year and hinted that rate hikes are a possibility but not a certainty. However, one member's projection was missing from the dot plot, leading market observers to suspect Warsh did not submit his forecast.
A note attached to the projection materials showed that 18 of the 19 participants submitted rate and economic projections. Since the dot plot is an anonymous summary of expectations, it is impossible to confirm whether the missing projection was indeed Warsh's. But before the meeting, market observers widely expected Warsh not to participate in the Summary of Economic Projections (SEP). Some suspected he might try to abolish the mechanism entirely. Additionally, one dot was missing from the 2028 projection.
Warsh has long criticized the dot plot and other forward guidance from the committee, including SEP projections for unemployment, inflation, and GDP.
Besides the widely expected rate decision, the FOMC's post-meeting statement not only removed previous language hinting at future easing but also substantially shortened the rest of the statement.
This week's statement was only 130 words, down from 341 words after the April 29 meeting. It provided a brief summary of economic conditions and then pledged to control inflation.
The statement said: "Despite some degree of uncertainty, partly attributable to the Middle East conflict, economic activity continues to expand at a solid pace. Productivity growth and capital investment are robust. Employment growth is keeping pace with the labor force, and the unemployment rate has changed little."
The committee added: "Inflation remains above the committee's 2% target, partly due to supply shocks pushing up prices in some sectors, including energy. The committee is committed to achieving price stability."
The statement also noted that the Fed would maintain its policy of 'ample reserves' in the banking system, suggesting no immediate plans to reduce bond holdings from the central bank's $6.7 trillion balance sheet, despite Warsh's earlier advocacy for such a move.
Previously, at the April meeting, reserve bank presidents had opposed the so-called 'forward guidance' language to retain the option of future rate increases or cuts, resulting in three dissenting votes. This statement was passed unanimously.
Amid uncertainty about the rate outlook, officials also adjusted their guidance on future policy direction. The dot plot, which anonymously shows participants' rate expectations, erased the previous expectation of one rate cut this year and pushed any potential cuts to 2027 and 2028, as policymakers assess the persistence of inflation spikes triggered by the Iran war.
The dot plot shows the median projection for the federal funds rate at year-end is 3.8%, about 0.16 percentage points above the current level, indicating rate hikes are fully on the table. Officials continue to expect the long-run federal funds rate to be 3.1%.
Officials also raised their economic projections, lifting 2026 headline inflation to 3.6% and core inflation to 3.3%. In March, the previous update, committee members had forecast both at 2.7%. They slightly reduced GDP growth expectations to 2.2%, down 0.2 percentage points from March; and lowered the unemployment rate projection to 4.3%, down 0.1 percentage points.
The inflation spike has left policymakers in a dilemma, as traditional policy discipline requires them to look through short-term supply shocks, such as war-related energy price surges.
Recent inflation indicators hit multi-year highs. The May Consumer Price Index (CPI) showed an annualized inflation rate of 4.2%, although the core measure excluding food and energy was lower, at 2.9%. Inflation has been above the Fed's 2% target for the past five years.
Although Warsh has made few public comments outside his confirmation hearing before being sworn in as chair on May 22, he has long argued that policymakers should generally look through supply-driven inflation when setting policy. He also insists that artificial intelligence will ultimately have a deflationary impact on the economy, as productivity gains help lower the cost of goods and services.
However, the unexpectedly strong labor market complicates the case for rate cuts. May nonfarm payrolls again beat expectations, adding 172,000 jobs, while the unemployment rate, the Fed's most closely watched metric, has remained unchanged at 4.3% over the past year.
Market pricing is aligned with the FOMC's expectations. According to CME's FedWatch tool, markets expect no rate cuts in 2026 and anticipate a 25-basis-point rate hike before year-end.
