The Federal Reserve left interest rates at the current level, in line with consensus forecasts. The range for the federal funds rate remains 3.5‑3.75%.
Statement cut three‑fold. Fed abandons rate‑cut announcements
The June statement was significantly shortened – its length is almost three times smaller than in April. The content focuses almost exclusively on describing the current economic situation, abandoning a broader discussion of monetary policy implications. In the media, such a substantial reduction in the statement is linked to earlier remarks by Chairman Warsh about simplifying Fed communication.
It seems more likely, however, that dropping elements of forward guidance is a compromise between divergent views among committee members regarding the future direction of monetary policy. The most significant change from April is the disappearance of a clear suggestion of future monetary easing. The current message reflects more the split opinions among its members.
This divergence is also confirmed by the dot‑plot chart. The number of FOMC members favoring rate hikes in 2026 is the same as the number supporting keeping them unchanged (nine each). Even greater variation is seen in 2027 forecasts, where eight members expect further tightening.
It is worth noting that the summary does not include the Fed Chair’s vote, who did not change his forecasts (he opposes the dot‑plot publication). His stated position remains more dovish than the median expectations. The main basis for more hawkish rate forecasts is higher inflation expectations.
The median PCE inflation forecast rose from 2.7% to 3.6% in 2026 and from 2.2% to 2.3% in 2027. The median core PCE inflation forecast was raised from 2.7% to 3.3% in 2026 and from 2.2% to 2.5% in 2027. Meanwhile, GDP growth and unemployment rate forecasts remained virtually unchanged.
Kevin Warsh’s Strategy: 5 analytical teams and a hard fight against inflation
During the press conference, the new Fed Chair K. Warsh announced the creation of five analytical teams on:
1) Fed communication,
2) bank balance‑sheet management policies,
3) assessment of new data sources,
4) productivity and employment analysis,
5) evaluation of the institutional inflation‑targeting framework.
The majority of questions at the conference were dedicated to the goals that should guide the teams – but answers mainly indicated that assessments would have to wait for actual analytical results.
Questions strictly about monetary policy focused mainly on limiting forward guidance and potential second‑round effects from the Iran conflict. Regarding communication, the Fed Chair noted that in current conditions it would be difficult to formulate credible statements about the future path of monetary policy.
Regarding inflation outlook, K. Warsh emphasized that preventing second‑round effects remains one of the main priorities for FOMC members and will be discussed at future meetings.
After the hawkish signals from the Fed, the market values significant chances of rate hikes by year‑end. According to the CME FedWatch monitor, futures contracts imply the most likely scenario of a federal funds rate range of 3.75‑4.00% in December (38% probability), followed by a rise to 4.00‑4.25% (33%).
We find these assessments too aggressive – with an agreement between the US and Iran, the energy shock effects should be less severe than those currently expected by FOMC members. Therefore we remain that rates will stay stable to year‑end, and in 2027 a cut is more likely.
