The Kevin Warsh era at the Federal Reserve began Wednesday, and analysts say officials appear to be prepping for an interest rate increase before the end of the year. As expected, the central bank held rates steady at the meeting, but analysts believe that with a healthy economy and high inflation, a hike looks more likely.
While Warsh, the new Fed chair, stressed that officials’ forecasts “were coming in with pencils—those kinds with big erasers,” nine of the `18 projections released Wednesday call for at least one interest rate increase in 2026. In addition, unlike at previous meetings, there were no dissenting votes around the policy decision. In the bond futures markets, the odds of a rate increase this year rose further in the wake of the meeting to more than 85%.
The meeting also featured what analysts believe will be the beginnings of changes to the Fed’s communication policies under Warsh. For example, the central bank’s announcement on the rate decision was cut to 114 words from more than 300 words at its last meeting. Unlike the announcements under former Chair Jerome Powell (who remains at the Fed as a governor), there was no guidance on where the Fed may take rates. In addition, Warsh did not submit a projection to the so-called “dot plot” of forecasts.
Still, analysts reading the tea leaves mainly saw a shift toward potential rate hikes. The Fed’s statement removed any discussion about lowering rates if needed. Instead, it said: “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.”
Alfonzo Bruno, associate portfolio manager at Morningstar Wealth, explains, “Based on the removal of the dovish bias in the statement, how the labor market is trending, still-sticky inflation, and very elevated asset prices, it certainly feels like the Fed is starting to lay the groundwork for its next move being a hike.”
Christopher Hodge, chief US economist at Natixis, viewed Warsh as starting his tenure ”with a bang.” He wrote that the new chair “was unambiguously hawkish and doubled down on the notion that ‘inflation is a choice.’ It is clear that inflation will be the focus for the Fed in the near term and that plenty of changes to process, analysis, and communication are afoot.”
Without any forward guidance in its statement, analysts looked to the Fed’s Summary of Economic Projections, aka the dot plot. To Bruno, it “told a more hawkish story than the vote.” He notes that the median dot for year-end 2026 rose to 3.8% from 3.4% in March, which he says flips “the committee’s implied next move from a cut to a hike.” In addition, the Fed sharply raised its year-end forecasts for its preferred inflation measure, the Personal Consumption Expenditures Index, to 3.6% from 2.7%. That compares with the Fed’s target inflation forecast of 2%.
Federal Funds Rate: Historical Data and FOMC Projections
However, Rick Rieder, BlackRock’s chief investment officer of global fixed income, had a more cautious take on the interest rate outlook. “While we don’t believe that a Fed hike is a given from here, we need to be respectful of that policy potential,” he wrote Wednesday.
But Rieder also believes more significant operational changes are coming for the Fed, writing that Warsh “signaled a future policy that will be less focused on signaling. That is to say that ‘forward guidance’ will be less integral to how policy moves and evolves. Further, we may also see less regular and less frequent communications from the Fed than we have been used to … Not only do we think this Fed will be different in reduced forward guidance, including potentially getting rid of the famous ‘dot plot’ over time, but also in anticipating where employment and inflation may be heading versus a stricter adherence to the recent focus on ‘data dependence.’"
