US Federal Reserve: On hold, with a good chance of a hike

The economist view

As expected, the US Federal Reserve kept rates on hold following their June meeting, with the Fed funds target range remaining at 3½ to 3¾% with the vote unanimous. Despite new Fed chair Kevin Warsh’s dislike of them, the Fed also published a set of economic projections including the ‘dot plots’ for policy where participants write down their expected path for interest rates. Those dot plots showed 9 out of 18 participants indicating a rate hike this year on raised inflation forecasts (Warsh did not submit projections).

The median personal consumption expenditures (PCE) inflation forecast was revised up significantly for 2026, from 2.7% at the March meeting, to 3.6%. The 2027 median forecast was raised slightly and unchanged for 2028 (at the 2.0% target). Core PCE was revised higher for all three years (though only by a tenth for 2028).

One of the most notable changes under Warsh was, as expected, communication. The statement was notably shorter than usual with significant language changes.

One of the most notable changes under Warsh was, as expected, communication. The statement was notably shorter than usual with significant language changes. The forward guidance language expressing an easing bias was removed (as expected), arguably moving them to a neutral stance (Warsh said in the opening statement that they agreed forward guidance “was not well-suited to the current policy conjecture”). The new statement is more factual – saying what the central bank did, describing the current state of the economy and inflation, and little more.

However, looking at what it did say in the statement, while “job gains have kept pace with the workforce, and the unemployment rate has changed little”, inflation “remains elevated” and the final sentence reads “the committee will deliver price stability” with no equivalent sentence for full employment. That, in line with the participant projections, looks consistent with it seeing the labour market as less of a concern than inflation and indicating it is more likely to raise rates than lower them.

Warsh announced that there would be five task forces launched, including one on communications and one on the balance sheet, but also on the impact of artificial intelligence (AI) on productivity and jobs. The latter might perhaps help Warsh build a structural case for rate cuts in the longer term. A number of his press conference answers included something along the lines of “the good news is we have got a taskforce for that”.

Big shift in guidance

We got a strong flavour for just how little guidance on the outlook and the Fed’s thinking we may get from Warsh in the press conference. For example, when asked why it didn’t hike and what it would need to see to get to that point, Warsh just said, “I’ve got nothing more to say than the statement itself.” He talked about wanting unfiltered market indicators that react to data rather than reflect Fed communications so that they can then take more information from markets. All this is a significant change from former chair Jerome Powell, who would answer questions like that in some detail, effectively giving plenty of guidance around the Fed’s reaction function.

Warsh’s language leaned hawkish

For example from the opening statement: “Persistently high prices are a burden for the American people. But the recent past need not be prologue. I am pleased to report that members of the FOMC are unambiguous and unanimous: This Committee will deliver price stability.” That theme of delivering on price stability was returned to several times during the press conference. At one point Warsh said that the commitment to deliver on price stability was “strong, unanimous and unambiguous and that’s I think an important message. We’ve missed for five years and we’re going to fix that.” And at another point, “What you heard from the committee today is that we’ve got some work to do on the price stability front.”  On the policy stance, Warsh also said that restrictiveness was uneven. For housing, he said, Fed policy appears somewhat restrictive, but he later said that it was hard to use those words anywhere else.  

A hike, however, is not baked in

Somewhat more enlightening perhaps was his point on the projections that “half of my colleagues thought that the policy rate should be at this level or lower between now and year end, the other half thought higher,” and that, “there’s a range of views on the questions of first and second round effects,” but “no resolution or conviction”. He made the point that they will be meeting again in six weeks and “I think we are going to know more then.”  He also noted that all submissions for the dot plots were written in pencil, “that’s to say that I think my colleagues…when they submitted their dots, understand the world is changing quite quickly and they didn’t feel bound by them six weeks from now or six days from now and in the event… circumstances change.” He said what he heard around the table “as they submitted their modal forecasts” was “this was more likely than their other scenarios. So I didn’t hear tons of conviction.”

Warsh gave the impression of a committee working well together and spoke at one point about their discussions as ‘a good family fight’.

Easing some concerns on independence

Warsh gave the impression of a committee working well together and spoke at one point about their discussions as “a good family fight”. He was very careful in the way he characterised views on the committee and was very respectful to his colleagues throughout. His focus on price stability also likely helps reduce concerns.  It will be interesting to see how the various taskforces play out with these recruiting from outside the Fed, but he gave the impression of an openminded committee on these themes.

The fund manager view

The Fed left rates unchanged at 3.50–3.75%, but that headline obscures what was a meaningful shift in both tone and reaction function. This was Kevin Warsh’s first meeting as chair and it already feels like a move back towards more traditional central banking: less forward guidance, less market hand‑holding, and a greater emphasis on letting incoming data speak for itself.

The message is clear: the Fed is no longer trying to guide markets towards an outcome – it is reasserting control over the inflation mandate and stepping away from being a de facto backstop for risk assets.

The policy statement was stripped back materially, and the previous easing bias has effectively gone, while the dot plot and projections point to inflation remaining above target and a non‑trivial risk of further tightening rather than cuts. The message is clear: the Fed is no longer trying to guide markets towards an outcome – it is reasserting control over the inflation mandate and stepping away from being a de facto backstop for risk assets.

Markets didn’t take this particularly well. The front end led the move, with two‑year yields and 1y1y forward rates pushing higher as investors repriced the risk that the next move could still be a hike. At the same time, the curve flattened meaningfully. That combination tells an important story: tighter near‑term policy expectations, but growing confidence that inflation will ultimately be contained. That is also evident in inflation markets, where breakevens – particularly at the front end – have moved lower over recent days. In effect, a more credible, inflation‑focused Fed is beginning to anchor expectations, even as it creates near‑term volatility. Overlay that with the potential for easing geopolitical tensions – in particular in the Middle East, and potentially Ukraine – and one can see a plausible path towards a more pronounced disinflationary impulse being priced into the curve. From a market perspective, we may now see a shift into a more data‑dependent regime – with inflation prints, energy prices and growth indicators driving market outcomes rather than Fed guidance.

Looking forward, the key dynamic is that the Fed now sounds more explicitly willing to tolerate some weakness in growth in order to regain control of inflation. The housing sector in particular is already relatively soft (partly reflecting higher long-end yields feeding through to mortgage rates). That creates an interesting tension: near‑term policy may remain restrictive, but slower growth could ultimately pull longer‑dated yields lower over time.

Our core view is that any inflation impulse linked to geopolitical risk will prove temporary, and that potential peace developments – whether in the Middle East or Ukraine – could introduce a meaningful disinflationary impulse.

From a global perspective, we felt that short-dated US looked expensive relative to other markets, and this has been borne out as front‑end US yields have repriced higher. We think that US real yields remain attractive on a cross‑market basis and, despite the recent decline in breakevens, longer‑dated TIPS continue to offer value. More broadly, our core view is that any inflation impulse linked to geopolitical risk will prove temporary, and that potential peace developments – whether in the Middle East or Ukraine – could introduce a meaningful disinflationary impulse. In that environment, we believe that any precautionary policy tightening is likely to be reversed relatively quickly, ultimately pointing to lower yields over time.

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