Fed Holds But Sends Hawkish Signal; Warsh Downplays Forward Guidance
Fed Chairman Kevin Warsh said after his first policy meeting that restoring price stability will be his core mission. Earlier, Fed officials held interest rates steady and signaled support for rate hikes this year.
Warsh said at the press conference that persistently high prices are burdening Americans, but the past does not necessarily determine the future, and the Federal Open Market Committee (FOMC) is committed to achieving price stability.
Meanwhile, Warsh downplayed the importance of his colleagues' latest rate projections. The dot plot showed 9 of 19 officials expect at least one 25-basis-point hike this year, with 6 expecting at least two hikes, while 9 expect rates unchanged or cut.
Warsh said other officials are not very confident in their projections either, and many acknowledged high uncertainty about the economic outlook. When asked about the rate debate at this meeting, he said the committee had a healthy internal debate.
The new chairman, a longtime critic of so-called forward guidance, said he personally declined to submit a rate forecast.
The FOMC voted unanimously Wednesday to keep the target range for the federal funds rate at 3.5% to 3.75%.
After the decision, Treasuries sold off, the dollar rose, and stocks fell. After Warsh's press conference, traders saw a 100% probability of a rate hike by October.
FOMC Statement
The post-meeting statement said inflation remains elevated and officials reiterated their commitment to achieving price stability. The statement continued to describe economic growth as solid and noted strong productivity growth and capital investment. The policy statement was more streamlined than previous ones, possibly signaling a change in future communication style.
Warsh, who took office last month, pledged to push for institutional changes at the central bank and announced the formation of several working groups to evaluate five areas of Fed operations and study possible reforms.
The working groups will study communication mechanisms, the balance sheet, the Fed's use and reliance on current data sources, productivity and employment, and the central bank's inflation framework. Warsh said the working groups will involve external experts and be supported by Fed staff.
In response to questions, he ruled out revisiting the 2% inflation target. He said he sees no reason to revisit the issue until we have re-proven our ability and determination to achieve the 2% target.
Policymakers made multiple adjustments to the economic projections released in March, raising the median forecast for this year's inflation from 2.7% to 3.6%, and the 2026 core inflation forecast from 2.7% to 3.3%. Meanwhile, officials lowered the median 2026 GDP growth forecast from 2.4% in March to 2.2%, and the median end-2026 unemployment forecast from 4.4% to 4.3%.
Asked about the Fed's decision to hold rates steady, Trump told reporters in France on Wednesday that it was fine, whatever. When asked about potential rate hikes, Trump said doing so would only drag down the US economy and would be very unusual. However, he added that now we have a very good person over there, and I will respect his opinion.
