With a new Fed Chair and plans for evolving operating strategies, the Federal Reserve maintained its target policy rate at the conclusion of the June Federal Open Market Committee (FOMC) meeting. For the fourth consecutive meeting, the FOMC maintained the short-term federal funds rate at a top rate of 3.75%.
The central bank also reaffirmed its current balance sheet strategy of ample reserves. This is important because some analysts have speculated that Chair Warsh would be more aggressive with respect to managing the Fed’s balance sheet. However, such a change in strategy may come later, as described below.
Overall, the FOMC statement was short, even laconic, indicating a new communication strategy. There were no dissenting votes. The two-year Treasury rate increased by more than10 basis points after the FOMC announcement. It is worth noting that while the statement was short, the press conference revealed a number of new plans under Fed Chair Warsh.
While holding rates constant, the Fed pivoted to a more hawkish tone in its policy statement. Among the items dropped from the current FOMC statement was its prior easing bias for monetary policy. This is consistent with recent moves in the bond market, which have increased long-term interest rates as a result of elevated inflationary pressure from increased energy and commodity prices due to the Iran war and the lingering impacts of tariffs. It is worth noting however that forecasts suggest this inflation pressure should ease in the coming months, which should be part of the Fed’s outlook.
The statement also declared that the Fed “will deliver price stability.” This wording was emphasized by Chair Warsh in his press conference. Without a reference to full employment, this formulation suggests a hawkish bias toward fighting inflation.
The FOMC statement noted that the economy is expanding at a “solid” pace despite geopolitical macro concerns, such as the Iran war. The statement also indicated that productivity growth is strong, which is a dovish signal many may downplay amidst the overall hawkish tone of today’s statement. The Fed also stated that inflation remains “elevated” relative to the FOMC’s goal of two percent (an explicit nod to no change for the target under new leadership).
Looking forward, the Fed’s outlook for the economy and monetary policy reflects recent supply shocks. Estimates from the central bank’s updated Summary of Economic Projections (SEP) indicate a solid but weaker economic growth outlook, with a 2.2% fourth-quarter year-over-year growth rate for 2026 (revised down from 2.4% as projected in March) and 2.3% for 2027 (unchanged from March).
The SEP estimates also reveal an expectation of a low 4.3% unemployment rate in 2026 and a notably increased expectation for inflation (core PCE) of 3.3%, revised higher from 2.7% in March. The revised SEP does not anticipate the economy reaching the Fed’s target inflation rate of 2% until after 2028.
With respect to policy, the SEP outlook is significantly more hawkish in the near term. The dot plot suggests at least one rate hike by the end of 2026 (nine respondents indicated a hike, eight indicated no change, and one saw a cut for 2026), followed by a cut in 2027 and a further cut in 2028. The long-run projection (beyond 2028) for the federal funds rate was unchanged.
It is notable that there was a missing dot plot participant for the SEP. Chair Warsh confirmed at his press conference that while he encourages FOMC members to participate, he himself did not do so. Warsh also announced a task force to review Fed operations in five areas: Fed communications, the Fed’s balance sheet, data sources, productivity and employment analysis, and the Fed’s inflation framework. This task force will propose changes to Fed policies, including the balance sheet.
In the press conference, Warsh also noted that current Fed policy is “somewhat restrictive” for the housing market, although Fed policy is not the single determinant of the challenges in the housing market. This is not necessarily the case for other sectors of the economy according to Warsh.
Overall, the June meeting pivoted the Fed to a notably more hawkish bias, reflecting an increase in current inflationary challenges. Without relief from underlying causes of inflation, Fed policy action will not aid the housing and building market in the near term. However, there are dovish or disinflationary possibilities in the outlook, from resolution of geopolitical headline risks or benefits from productivity growth.