A new era for the Fed

The Fed has shifted to a more hawkish stance at the first meeting chaired by Kevin Warsh. Although rates were left unchanged, there will be meaningful adjustments to how the Federal Reserve operates in the coming months and years.

There are two main takeaways from today’s meeting, firstly what the Fed did, and secondly, what they are planning to do. The main shift was in their Summary of Economic Projections. The SEP showed a reduction in GDP expectations for this year to 2.2%, down from 2.4% in March. However, inflation  was revised dramatically higher. Core PCE, which is the Fed’s preferred measure of prices, was revised up to 3.6% from 2.7% for 2026, the 2027 rate was stable at 2.3%, and the FOMC does not see inflation returning to the Fed’s target rate until 2028.

Unsurprisingly, the Dot Plot also pointed to a major hawkish shift at the Fed, with more than half of members seeing a 25bp rate hike by the end of this year. Conspicuous by its absence, Warsh refrained from giving an interest rate projection, which we will talk about in more detail below.

When Kevin Warsh was a governor at the Fed, he was a noted hawk, and this instinct remains now that he is chair. He repeated multiple times during his press conference that the Fed needs to deliver on its mandate for price stability. While the Fed still has a dual mandate, it also needs to ensure full employment, the Fed’s focus is now on inflation, and CPI and PCE releases will be critical market events from now on.

The Fed was unlikely to maintain its easing bias with inflation above 4%, but there were some who expected Warsh to err on the dovish side, possibly in a nod to President Trump. For now, Warsh does not sound like he is the White House’s puppet, although he is likely to enact radical change.

The biggest change at today’s meeting was the statement. Its brevity was astounding, and it was less than half the length of other FOMC statements. The Fed under Governor Warsh gets straight to the point and doesn’t waste a word. The highlights from the statement included:

• Economic activity is expanding at a solid pace.
• Inflation remains elevated relative to the Committee’s 2% target.
• The Committee ‘will deliver price stability’.

Kevin Warsh has essentially disbanded with forward guidance in written form, although the SEP and the Dot Plot tell us the direction of travel for the Fed. This statement, however, is extremely clear in its message: rates are going nowhere but higher, if inflation does not come back to target.

We had expected Warsh to sound critical of forward guidance, but he has been even quicker than we thought at introducing his style of leadership to the Fed. While some worry that a lack of guidance from the Fed could confuse financial markets, we think that the opposite is true. The laser focus on prices could ultimately make it easier to predict what the Fed does next.

The other points that are worth noting include: Warsh has announced five new task forces to study and improve the Fed’s communication style, one to study the balance sheet, to look at economic data, to analyze the impact of AI and to look at the Fed’s inflation approach. These will be reported back by the end of the year, so in the coming months we could see some big changes at the Fed.

The markets didn’t like what they heard from Warsh’s first meeting, and US indices all closed lower on Wednesday, led by communications, consumer discretionary and the real estate sector. Treasury yields jumped sharply, with the 2-year yield higher by 13bps, although moves in the dollar were mild.

Interestingly, stock futures in the US ticked higher late on Wednesday, which suggests the market may warm to Warsh.

Stock futures may also be placated by news that the US and Iran have officially signed the Memorandum of Understanding to end the war. The oil price is slightly higher on this news, as we could get a ‘sell the rumour, buy the fact’ situation. The oil price has fallen 10% in the past week, so further weakness in the oil price may only come when we get understand how and when the Strait of Hormuz will reopen and how it will operate going forward.

Overall, Kevin Warsh is shaking things up at the Fed. Anyone hoping that he would advocate for rate cuts or bend the knee to Donald Trump will be sorely disappointed by his first outing as  Governor.