Fed holds rates in Warsh debut, projects hawkish turn that sends stocks lower and dollar higher

The decision

The Federal Open Market Committee held the federal funds rate steady on Wednesday, keeping borrowing costs at the 3.50–3.75 percent range first introduced in January. The vote was unanimous, a sign that Chair Kevin Warsh, who took office last month, had succeeded in consolidating a committee that had seen three dissents in April.

Investors had widely anticipated the hold and instead focused on the updated statement and economic projections. The committee dropped its long-standing reference to “additional adjustments” in the policy statement, a phrase that had signalled a bias toward further rate reductions, and replaced it with language that leaves open the possibility of a hike.

We expect a more neutral bias. It’s possible the committee, under Warsh, takes a cleaver to the statement and wipes out rate guidance altogether.

Statement and projections

The quarterly Summary of Economic Projections showed a more pessimistic outlook on inflation. Policymakers now expect year‑end PCE inflation of 3.6 percent by the time 2027 rolls around, up from 2.7 percent in March. The shift reflects the lingering impact of an oil‑price shock driven by the U.S.–Israeli war with Iran earlier in the year.

Despite a recent retreat in oil prices, Brent crude slipped below $80 a barrel on Tuesday, nine of the 19 members pencilled in a quarter‑point rate increase by December. Markets responded by nudging the chance of a December hike to roughly 43 percent, according to CME Group’s FedWatch tool.

Attention will rest squarely on Chair Warsh’s debut press conference, and there is a high degree of uncertainty surrounding his communications given his brief media appearances thus far.

Warsh’s communication challenge

Warsh has long argued that central bankers talk too much, and his confirmation testimony hinted at scaling back forward guidance. Analysts watched closely whether he would push back against the market’s hawkish repricing, a move that could either calm or unsettle investors.

The backdrop is politically charged: President Donald Trump repeatedly urged looser policy under previous Chair Jerome Powell and has since indicated he will give Warsh room to act. Still, Warsh must navigate a committee that includes Powell, who remains a voting member as a Fed governor.

We expect Warsh to sound noncommittal at his first press conference. Partly because it’s his first press conference, and it would be a good idea to not sound too far from the committee’s views.

Market reaction

Wall Street turned sharply lower after the decision. The Dow fell, the S&P 500 and Nasdaq declined, and the dollar extended its gains against major currencies. The 10‑year Treasury yield edged up to 4.435 percent, while the two‑year yield, most sensitive to rate expectations, rose two basis points to 4.06 percent.

The moves came despite a stronger‑than‑expected retail sales report earlier in the day, which showed a 0.9 percent jump in May, partly fuelled by elevated gasoline prices. Core sales, which strip out autos, gasoline, building materials and food services, rose 0.7 percent.

Oil and the Iran deal backdrop

The Fed’s shift was cushioned by a tentative U.S.–Iran memorandum of understanding that extends a fragile ceasefire by another 60 days and could open the Strait of Hormuz to fuller oil shipments. Reports that Washington would waive sanctions on Iranian oil for a defined period helped push Brent crude to around $79 a barrel, well off the four‑year highs seen during the conflict.

Still, the deal is incomplete. President Trump warned he could resume bombing if dissatisfied with the terms, and a private $300 billion fund designed to trigger investment remains only half‑committed. The outcome of the Iran talks will shape the inflation path that Warsh’s Fed must navigate in the months ahead.