Fed holds steady at Warsh debut, signals hawkish shift and new chapter for central bank

Executive summary

Federal Reserve (Fed) policymakers kept rates unchanged in a range of 3.50% – 3.75%, which was widely expected. However, the meeting statement was a terse, 132 words, which is the shortest in more than 20 years.

More importantly, the so-called dots shifted markedly upward for this year and next, indicating that half of the Federal Open Market Committee (FOMC) is penciling in rate hikes. That reflects a committee that sees dramatically higher inflation and slightly lower growth this year.

Of course, all eyes were on new Chairman Kevin Warsh, who echoed the rather hawkish tone implied by the dots. He also unveiled a five-pronged review of key areas – including Fed communications – that should be completed by year end.

Ultimately, the Fed acknowledged elevated inflation, driven by higher global energy prices. More notably, the committee struck a hawkish tone, appearing to align with investor expectations for a rate hike this year. We still believe that the bar for a rate hike in 2026 remains high based on current conditions.

U.S. stocks and bonds saw declines post announcement. The S&P 500 declined more than 1% for the day, while the 2- year and 10-year U.S. Treasury yield rose to 4.21% and 4.49%, respectively.

What happened

At its June rate-setting meeting, the Federal Open Market Committee maintained the target range for the federal funds rate at 3.50% – 3.75%. Notably, this was the first unanimous decision since September. There were no other policy changes.

The FOMC also released its quarterly Summary of Economic Projections (SEP), which now sees modestly less economic growth and dramatically higher inflation. On the latter point, the near-term inflation forecasts jumped to 3.6% from 2.7% in their March view.

Additionally, a majority of the committee – 9 of the 17 members that submitted rate projection dots – saw the potential of rate hikes this year. However, during the post-meeting press conference, Chairman Warsh noted that he didn’t submit dots since he strongly opposed using “forward guidance.” Furthermore, Warsh seemed to downplay the hawkishness implied by the dots, saying that he “didn't hear tons of conviction” and suggested that they were "submitted in pencil" as the current situation was fluid and rapidly evolving.

Warsh also announced a five-pronged review of key areas that are central to the broad conduct of monetary policy. First, Fed communications, the Fed's balance sheet, the use and reliance on existing data sources, reviewing productivity and jobs in an era of transformation, and examining the Fed's inflation frameworks.

He also mentioned that both price stability and full employment are important, and that one doesn't outweigh the other. That was likely meant to address the standalone final line of the meeting statement, which noted, “The Committee will deliver price stability.”

On a personal note, Warsh was very complimentary of the Fed, as an institution and of the rest of his colleagues. He also noted his welcome back to the Fed has been warm and collegial. 

Our take

The tone of the meeting statement, the dots, and Chairman Warsh’s demeanor during the press conference were overtly hawkish. It’s important to note that this isn’t as simple as “Warsh made these changes” as nine members saw the potential of rate hike(s) in the near term. Yet, as he noted, the current situation was fluid and rapidly evolving, which we interpret to mean “rate hikes aren’t a lock.”

Indeed, there’s a new sheriff in town. Absent were several hallmarks of Chair Jerome Powell’s tenure, such as a mention of data dependency to guide decisions and that policy rates are not on a preset path.

Alas, we’re conceding that our view—that the “Fed’s next move is a rate cut, but time is running out in 2026”—now appears out-of-consensus. That said, we maintain our belief that monetary policy remains somewhat restrictive currently, particularly with elevated prevailing rates (e.g., the 10-year U.S. Treasury yield at roughly 4.5%). Moreover, our view appears to be validated by Warsh’s downplaying of the committee’s rate hike projections. Furthermore, we’ve already seen a sharp decline in crude oil prices in the past week thanks to the deal to reopen the Strait of Hormuz. Ultimately, we still believe that the bar for a rate hike in 2026 remains high based on current conditions.

Bond market implications

Over the past several weeks, the tentative U.S.-Iran ceasefire and the rising prospect of an interim peace agreement has resulted in a mixed reaction across the yield curve. On the one hand, 5- to 30-year U.S. Treasury yields are trading below their mid-May highs based on inflation expectations falling from their recent peak. Since May 19th, the 10-year yield declined from 4.67% to 4.44% through yesterday’s close. However, shorter-dated yields continued to exert upward pressure based on rising expectations that the Fed will raise the federal funds rate by year end to combat rising inflation. Ahead of today’s rate decision, traders placed an 84% probability that the fed would raise the policy rate by 25 basis points (0.25%) by year end. Thus, the 2-year U.S. Treasury yield is just below its highest level since February 2025.

In the trading hours ahead of today’s FOMC rate announcement, yields held relatively steady awaiting the updated economic projections and Chairman Warsh’s inaugural comments. However, once the committee’s official statement and June SEP report were released, yields spiked in response to a more hawkish bias among Fed officials relative to the previous FOMC meeting and embedded market expectations. The Fed’s notably concise statement also placed a larger emphasis on restoring 2% inflation over the employment side of the Fed’s dual mandate. The upward yield move was particularly pronounced at the front end of the curve as the market fully priced in a rate hike by October.

During Chairman Warsh’s press conference, short-dated yields extended their rise; however, yields beyond 10-year maturities fell, suggesting some nascent growth concerns and buy-in to the Fed’s commitment to fighting inflation. As Warsh exited the stage, 2-year and 10-year U.S. Treasury yields were trading at roughly 4.21% and 4.49%, respectively, which are now approximately 70 and 30 basis points (0.70%; 0.30%) higher year to date.

U.S. Treasury yields, which are the primary driver of core fixed income yields in general, remain above our assessment of fair value. In late March, we upgraded our view of duration from neutral to more attractive when yields were similar to current levels. For portfolios concentrated in cash, very short-dated fixed income instruments (e.g., U.S. Treasury bills, money market mutual funds), or positioned below benchmark duration, the recent rise in yields creates a compelling entry point to add intermediate and longer-dated exposure. The 3- to 10-year maturity range offers a compelling balance of attractive income and moderate interest rate risk. We expect interest rate volatility to stay elevated in comparison to the benign rate environment of late 2025.

Bottom line

Aside from holding rates steady, the Fed delivered an overtly hawkish signal – across the meeting statement, projections, and Warsh’s press conference – that rate hikes were possible in the near term. The shift also marks a clear break from Powell-era communication, with less emphasis on data dependency and policy flexibility. While our view of a possible rate cut by year end is now out of consensus, we maintain that policy remains somewhat restrictive and the bar for hikes in 2026 is still high, supported by easing energy pressures and Warsh’s downplaying of tightening projections.