With Kevin Warsh at the helm, the Federal Open Market Committee (FOMC) delivered a hold today, leaving the policy rate unchanged for a fourth consecutive meeting. While the decision itself was widely expected, the accompanying Summary of Economic Projections hawkishly surprised and signaled that close to half of the Committee now believes that rate hikes might be necessary in 2026 to address still above-target inflation.
Ahead of the meeting, most Federal Reserve (Fed) watchers anticipated a leaner FOMC statement, consistent with Warsh’s well-known aversion to forward guidance, and the Committee delivered exactly that. Language previously viewed as signaling an easing bias was stripped out, as were references to the forward-looking assessment of the dual mandate and the appropriate stance of monetary policy. What remained in the substantially streamlined text was a concise but upgraded assessment of economic activity, productivity and labor market conditions alongside an acknowledgment that inflation “remains elevated relative to the Committee’s 2 percent goal.” The statement concluded with a particularly resolute declaration—“This Committee will deliver price stability.”—a phrase that Warsh would harken back to several times in the press conference.
Turning to the Summary of Economic Projections, median estimates for 2026 and 2027 core Personal Consumption Expenditures (PCE) inflation were revised substantially higher to 3.3% and 2.5%, respectively. As a consequence, nine of the 18 participants now see at least one rate hike before the end of 2026. Beyond that, the broader Committee now sees a more gradual path back to a longer-run neutral rate of 3.1%. Median expectations for growth and unemployment were largely unchanged with Warsh later confirming that he abstained from submitting his own forecast on the grounds that “it’s not helpful in the conduct of [monetary] policy.”
At the press conference, Warsh’s prepared remarks emphasized respect for the Fed’s remit, accountability to the American people and an unwavering commitment to restoring price stability. Given his outspoken criticism of the post-2008 Fed in the years leading up to his appointment as chair, there was potential for him to begin addressing those concerns directly in today’s press conference. But rather than tackle each issue individually in a Q&A format, Warsh announced the formation of specialized task forces to conduct comprehensive reviews of five areas of monetary policy he believes are “worthy of a fresh look:”
- Fed Communications
- Fed Balance Sheet Policy
- Data Sources and Collection
- Productivity and Jobs in the Era of AI
- Inflation Framework
The move signaled his intention to reassess key elements of the Fed’s policy framework in a more systematic manner, rather than through incremental changes or ad hoc commentary. Warsh was hopeful that these task forces could be formed in the next few weeks with findings and conclusions known by year-end. When pressed on each of these areas, Warsh offered minimal elaboration, deferring to the eventual findings of “the very best minds, both inside and outside the economics profession.”
Later in the press conference, Warsh was asked his opinion on the current stance of policy and whether or not it was restrictive. His candid response was that it’s currently “mixed”—restrictive for housing but not so for financial markets. He went on to suggest that this uneven transmission of monetary policy was perhaps the result of balance sheet policy, something that will eventually be tackled by a newly formed task force. When asked about his preference to eliminate forward guidance and whether that would create more volatility in financial markets, Warsh responded by saying that policymakers lose a valuable signal from financial markets if all they’re doing is responding to Fed forecasts. It’s his contention that markets can be more efficient and policymakers can make “more informed decisions” if financial markets are responding to their own perceptions of economic risks rather than just to Fed forecasts.
Today’s statement and press conference offered a striking contrast to those produced and conducted under the leadership of Jerome Powell. That said, we ultimately learned very little about Kevin Warsh’s impression of the current stance of policy and how forcefully he might exert his influence moving forward. Instead, the primary catalyst for today’s significant bear-flattening of the yield curve was the substantial upgrade to the broader Committee’s end-of-2026 inflation forecast and the view of roughly half of the Committee that policy tightening will be necessary to bring inflation down.
While the pace of inflation in 2026 is undoubtedly higher than in previous years and running above Fed targets, it remains difficult to disentangle the effects of compounding supply shocks from underlying trend inflation. Oil prices have significantly receded in the past several weeks as progress has seemingly been made to reopen the Strait of Hormuz. Even if prices simply stabilize at current levels, energy should begin to exert some downward pressure on inflation during the second half of 2026.
The labor market has shown signs of stabilization since late 2025, with job creation broadening across sectors. However, several indicators suggest underlying labor demand isn’t overheating. Business hiring plans have moderated in recent months, consumer employment surveys remain weak and wage growth continues to decelerate. As a result, despite a modest decline in the unemployment rate and a recent pickup in payroll growth, we continue to view the labor market as a limited source of inflationary pressure.
Putting all this together, our base case calls for softer 2H26 core inflation and an undershoot of the Fed’s 3.3% median forecast for 2026. Consequently, we expect the FOMC to keep rates on hold through the remainder of 2026, rather than follow the tightening path currently envisioned by roughly half of the Committee.