By Philip Marey, senior US strategist at Rabobank
Summary
- As widely expected, the FOMC kept the target range for the federal funds rate unchanged and dropped its easing bias. However, this unanimous decision was announced in an unusually short statement.
- What’s more, at his first press conference as Fed Chair Kevin Warsh terminated forward guidance.
- However, the Summary of Economic Projections had already revealed that half of the FOMC participants (who submitted a forecast) expected to hike before the end of the year. Warsh did not submit his forecasts.
- Other interesting features of the statement were the reaffirmation of maintaining ample reserves and the conclusion that the Committee will deliver price stability.
- At the press conference, Warsh announced the establishment of five task forces on: Fed communications, the balance sheet, improving data, productivity and jobs, and inflation frameworks.
- As uncertainty regarding the disruption in the Strait of Hormuz remains, we expect the Fed to remain on hold for the remainder of 2026.
Introduction
As widely expected, the FOMC kept the target range for the federal funds rate unchanged at 3.50 3.75% and dropped its easing bias. However, this decision was announced in an unusually short statement. The decision was unanimous, with Miran – who repeatedly dissented because he wanted to cut – was replaced by Warsh. The press conference was a clear break from in the Bernanke-Yellen-Powell era, with Warsh making an end to forward guidance.
FOMC statement and projections
The statement was so short, that we replicate it here:
The Federal Open Market Committee approved the following statement for release by a 12 – 0 vote:
The Committee decided to maintain the target range for the federal funds rate at 3-1/2 to 3-3/4 percent, in support of the Federal Reserve's dual mandate. The Committee reaffirmed its policy of maintaining ample reserves in the banking system.
Economic activity is expanding at a solid pace despite elevated uncertainty that owes, in part, to the conflict in the Middle East. Productivity growth and capital investment are strong. Job gains have kept pace with the workforce, and the unemployment rate has changed little.
Inflation remains elevated relative to the Committee's 2 percent goal, in part reflecting supply shocks that have driven price increases in certain sectors, including energy. The Committee will deliver price stability.
Most notably, the easing bias previously expressed in the statement as “In considering the extent and timing of additional adjustments to the target range for the federal funds rate…”., which suggested that the next change would be a rate cut -because the last three adjustments were rate cuts- was dropped.
Other interesting features of the statement were the reaffirmation of maintaining ample reserves – despite Warsh’s earlier stated goal to reduce the balance sheet – and the conclusion that the Committee will deliver price stability.
The new Summary of Economic Projections saw a large upward revision to the inflation forecasts for 2026 and core inflation in 2027. With minor changes to GDP and unemployment forecasts, the federal funds rate forecasts were revised upward in 2026, 2027, and 2028. In fact, the dot plot revealed that 9 out of 18 forecasting participants expected to hike before the end of the year. Warsh’s dots were missing. The median participant expects to get back to the current federal funds rate in 2027 and make another cut in 2028. This means we would have to wait at least until 2029 before the federal funds rate reaches its neutral level.
Warsh’s press conference
At the press conference, Warsh said that the FOMC recognized that inflation has been elevated for five years and that this Committee will deliver price stability. Warsh also announced the establishment of five task forces on: Fed communications, the balance sheet, improving data, productivity and jobs, and inflation frameworks. These task forces will include external experts.
Warsh also said that the FOMC statement was shorter and simpler, and that forward guidance was absent, because it is not suited for the current circumstances. He also confirmed that he refrained from providing projections, but he encouraged others to give their projections.
During the Q&A, he effectively terminated forward guidance. Any question regarding future policy decisions was deflected. He did say that financial markets work best if they react to the data and not to the Fed.
He also elaborated on his plans to improve the data: he prefers real-time data instead of echoes from history. He thinks current data are often based on old-fashioned survey methods.
Conclusion
Although Warsh ended forward guidance, the SEP remains in place at least until the task force on communication has completed its work, probably by the end of the year. Although half of the forecasting participants now expects to hike before the end of the year, it was only three months ago – and after the outbreak of the war – that the median participant still expected one cut in 2026. This proves Warsh’s point that projections may not be very useful in the current situation. As uncertainty regarding the disruption in the Strait of Hormuz remains, we expect the Fed to remain on hold for the remainder of 2026. We expect the Fed to cut twice in 2027, provided that inflation expectations remain stable. If not, we may also have to pencil in hikes.
