Key facts
- The Federal Reserve maintained its benchmark interest rate at 3.50%-3.75%.
- Policymakers now anticipate a rate hike by year-end, with median projections showing the federal funds rate at 3.8%.
- Inflation projections for year-end were revised upward, with PCE inflation expected at 3.6% from 2.7%.
- The FOMC statement removed forward guidance on future rate moves.
- New Fed Chair Kevin Warsh presided over his first policy decision and press conference.
The Federal Reserve held its benchmark rate flat at 3.5% to 3.75% in a unanimous decision during Chairman Kevin Warsh's first meeting. This move signals the central bank's continued focus on combating inflation, which has been exacerbated by rising energy costs due to the conflict in the Middle East. The FOMC statement was notably shorter and omitted detailed explanations of policymakers' economic outlook.
In his press conference, Chairman Warsh highlighted the statement's conciseness, stating it "dispenses with some older language" to "give you the facts as best we can judge it." The statement indicated that inflation remains elevated relative to the Fed's 2% target, concluding with a commitment to "deliver price stability." The decision marked a shift for some governors, with half projecting rate hikes by year-end, while eight expected rates to remain flat and one anticipated a cut.
This decision marks the fourth consecutive meeting where the Fed has kept rates steady, drawing frustration from President Donald Trump, who has advocated for cuts, and from inflation hawks concerned about the central bank's actions. Despite a temporary peace deal with Iran easing oil prices from wartime highs, inflation reached 4.2% in May, more than double the Fed's target and the highest since early 2023. Analysts noted that the interim U.S.-Iran deal provided relief, pushing oil prices below central bank baseline scenarios.
Previously, former Fed Chairman Jerome Powell had characterized price increases from the war with Iran as transitory. Similarly, tariff-related inflation had begun to decline before reversing course in March. The Fed's dual mandate also faces pressure on the employment front, with May's job additions of 172,000 primarily in healthcare, hospitality, and local government, while the financial sector cut 22,000 jobs and the tech sector laid off 116,000 employees this year, though AI hiring is increasing.
Market expectations have shifted, with traders now pricing in potential rate hikes later in the year, a change from earlier predictions of cuts. PGIM predicts three rate hikes this year, influenced by the oil price shock. A survey by the Financial Times and the University of Chicago indicated that over half of economists expect one 25-basis-point rate hike by year-end. Some analysts, like Michael Wetnight, do not anticipate rate changes until at least the third quarter, suggesting that borrowing costs are unlikely to ease significantly and that rates in the mid-to-low sixes are more probable.