FOMC: Hawkish hold; Chair Warsh signals a new Fed era by Emkay Global Financial Services Ltd
Hawkish hold; Chair Warsh signals a new Fed era
* The Fed kept its policy rate unchanged at 3.5-3.75%, as widely expected. However, there was an undeniable hawkish tilt, with the dot plot taking rate cuts off the table and with nine of the 19 FOMC members signaling at least one rate hike by the end of 2026. Notably, Chair Warsh did not participate in the dot plot, stating that he does not see it as “helpful in the conduct of policy”.
* This was just one of the many tweaks and changes under the new Chair, as the Fed looks to be heading toward a new era. The statement was much shorter than usual, with no forward guidance; it also eliminated the “easing bias” previously present, while not providing any information on how members voted. Further, the Chair announced multiple task forces for reviewing five areas—Fed communication, the Fed’s balance sheet, data, productivity and jobs, and the Fed’s inflation framework; these reviews are expected to be completed by year-end.
* The message was undoubtedly hawkish – the statement stressed the Fed’s commitment to the inflation mandate but not the employment mandate, emphasizing that the Fed under Warsh will be laser-focused on bringing inflation down. The dots were hawkish, while Warsh reaffirmed his view that the Fed’s “commitment to deliver” the inflation target is “strong”. However, there was a hint of the inflation target itself likely being tweaked – but only after the current 2% target was reached.
* Changes to the Summary of Economic Projections were hawkish – The Fed Funds Rate forecast for 2026 rose to 3.8% (from 3.4% in Mar-26), with that for 2027 and 2028 rising to 3.6% and 3.4%, respectively (from 3.1% earlier), taking rate cuts off the table completely. The 2026 growth forecast was pared (2.2% vs 2.4% in Mar-26), while the core PCE inflation forecast moved higher (3.3% vs 2.7% earlier), with that for 2027 and 2028 also moving higher.
* This new era for the Fed is likely to see much less forward guidance, and the dot plot may be dispensed with too, along with other major changes made to Fed communication. Warsh’s laser-focus on inflation (“inflation is a choice. You bet it is”) will come as a relief to the market, which was concerned about President Trump’s influence on Warsh to lower rates. The path for rates ahead looks upward-biased, especially with price stability as the key guiding principle for the Fed from here on.
* Market reaction: The US yield curve bear-flattened (2Y: up by 11bps, 10Y: up by 4bps), as markets assessed the new Chair’s focus on inflation. DXY rose 0.2% while the S&P500 was down 1.2%.
RBI’s focus will shift to domestic dynamics; bar remains high for a rate hike
While a hawkish Fed could add to the RBI’s policy constraints ahead, the end of the Iran crisis (for now) and the RBI+GoI’s measures to stabilize the Rupee and attract capital flows will mean that the RBI’s focus will now shift to domestic growth-inflation dynamics. The bar for a rate hike remains high, with the RBI likely to continue with its wait-and-watch policy and only act when second-round effects of the energy shock start emerging.
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