NEW YORK, June 17 (Reuters) – The Federal Reserve held the benchmark interest rate steady on Wednesday and policymakers expect rising borrowing costs later this year, reflecting growing concerns about inflation above the U.S. central bank’s 2% target. Markets sold off hard in the last hour of trading, with the 2-year Treasury note rising to its highest level in more than a year.
New quarterly projections showed nine Fed officials now anticipate a rate hike by the end of 2026, and an updated policy statement removed language that had been used to flag the likelihood of further reductions in borrowing costs in 2026.
With data showing strong U.S. hiring, a relatively low 4.3% unemployment rate, and inflation well above the U.S. central bank’s 2% target, many analysts had anticipated the Fed would hold rates steady on Wednesday.
The new chair, Kevin Warsh, spoke on Wednesday afternoon and quickly turned to a discussion of why the Fed is changing its approach to communicating with the public, including changes to the so-called dot plot of economic projections by Fed officials. Submissions come written with pencils “that have big erasers,” Warsh said, adding that policymakers “don’t feel bound by their dots.”
MARKET REACTION:
STOCKS: Stocks fell sharply late on Wednesday. The S&P 500 dropped 1.3% and the Nasdaq Composite fell 1.5%.
BONDS: The yield on benchmark U.S. 10-year notes rose 7 basis points to 4.495%. The yield on 2-year U.S. notes rose 17 basis points to 4.216%, their highest level since February 2025. U.S. rate markets were pricing in a 72% chance of a Fed rate hike by October.
FOREX: The dollar index was up 0.9% to 100.47.
COMMENTS:
ELLEN HAZEN, CHIEF MARKET STRATEGIST, F.L. PUTNAM INVESTMENT MANAGEMENT, WELLESLEY, MASSACHUSETTS:
“Clearly rates have ticked up as you have seen the higher inflation as well as the higher fed funds forecast in the SEP.”
“But what I’m hearing with all of the task force talk is that (Warsh is) punting. He’s saying, look, we’re going to examine communications, the balance sheet, the data sources we look at, productivity and inflation, and we’re going to evaluate how we’re doing on all those things.”
JOHN VELIS, AMERICAS MACRO STRATEGIST AT BNY, NEW YORK:
“While there was little concrete in the press conference about details of the changes a Warsh Fed will make, there was plenty of ambition. With his five task forces, Warsh has set in motion the mechanisms to address his reformed agenda. Balance sheet policy is a key one to watch. Even though it’s somewhat arcane, it is tremendously important for financial stability, the function of the banking system and money markets, and the transmission of monetary policy. We suspect there will be a great deal of ink spilt within the Fed and outside of it about the balance sheet’s fate.”
JAMES ST. AUBIN, CHIEF INVESTMENT OFFICER, OCEAN PARK ASSET MANAGEMENT, SANTA MONICA, CALIFORNIA:
“The statement is shorter and more concise that what we were used to in a lot of ways. But Warsh has been pretty forward about his communication style and how he wants to deliver less forward guidance. And that’s exactly what we got out of that statement in trying to let the market figure out what the Fed is thinking rather than the Fed telling the market what it is thinking. He was asked about that and his reaction was ‘we don’t want the market to react to us.’ There’s probably merit to that argument and he’s obviously studying a number of different changes, which I think is the right approach. He’s got to obviously bring a coalition or consensus to get things done.”
UTO SHINOHARA, SENIOR INVESTMENT STRATEGIST, MESIROW CURRENCY MANAGEMENT, CHICAGO:
“While the Fed paused as expected, the hawkish revision to the dots caused both the dollar and yields to rise while pressuring stocks lower immediately after the announcement. With a 12-0 vote and no dovish dissenters, implied market pricing for a Fed hike by year-end jumped from +20bps before the announcement to +30bps afterward, fully pricing a hike by year-end.
“While Warsh’s messaging during the press conference was to minimize forward guidance, the rest of the committee tilted decidedly hawkish with nine participants expecting a hike this year, eight expecting rates to remain unchanged, and just one expecting a cut.”
JAY HATFIELD, CEO/CIO, INFRASTRUCTURE CAPITAL ADVISORS, NEW YORK:
“The Fed issued a very short statement that was hawkish as it only mentioned the Fed’s commitment to price stability. The Dot plot was also hawkish with the median higher by approximately 50bp. We completely discount the hawkish dot plot as it includes all Fed Reserve Board member including all regional Fed Presidents who are almost universally hawkish. We believe … that the dots showing no increase include the two Republican members of the Federal Reserve Board. Consequently, we believe that there is no chance of a rate hike given the decline in oil prices. We continue to forecast 3 rate cuts over the next 12 months as inflation declines rapidly due to plunging oil prices, tariffs rolling out of the indices and gradually declining shelter inflation that finally reflects declining market rents.”
MICHAEL PEARCE, CHIEF US ECONOMIST, OXFORD ECONOMICS, NEW YORK:
“In a dramatically slimmed-down communication from the Federal Reserve, the key message was that roughly half the committee are now projecting a rate hike this year, reflecting persistent inflation concerns. Our inflation projections for this year and next are far lower than the median projection, which is why we expect the next move will still be a cut.
“In his first meeting as chair, Kevin Warsh took an axe to the policy statement, which now offers next to no guidance beyond a factual summary of the economic situation. He also appears to have declined to offer economic projections, with 17 of 18 participants submitting rate forecasts for this year and next.
“The committee is divided roughly in half, with nine participants seeing a hike or a few hikes this year, while a similar number expect cuts by end-2027. Some participants also raised their estimates of long-run neutral rates.”
MICHELE RANERI, VICE PRESIDENT AND HEAD OF U.S. RESEARCH AND CONSULTING, TRANSUNION, CHICAGO:
“The Federal Reserve’s decision today to keep interest rates unchanged should support near-term stability across most consumer credit markets. Recent inflation data adds complexity to the outlook, however, as headline inflation rose above 4% for the first time in three years, driven largely by increasing energy costs, while core CPI advanced a more modest and better-than-expected 0.2% in April. This divergence reinforces expectations that the Fed will likely remain on hold rather than pursue additional rate hikes or cuts in the near term.”
BRIAN STOREY, HEAD OF MULTI ASSET STRATEGIES, ORION, OMAHA, NEBRASKA:
“As the market was expecting, the FOMC left the fed funds rate unchanged at a target range of 3.5% to 3.75%. As opposed to multiple dissenters in the past several meetings, this vote to keep the policy rate unchanged was unanimous.
“Overall, the Fed struck a slightly less upbeat tone on the economy; the updated Statement of Economic Projections showed a slightly lower forecast for GDP growth in 2026 and a notably higher forecast for inflation, with core PCE projected to be 3.3% in 2026 vs. the March forecast of 2.7%. The updated ‘dot plot’ removed the prior outlook for one rate cut in 2026 with a shift to a median outlook of one rate hike by year-end.
“As it relates to financial markets, the fairly close alignment between the Fed’s ‘dot plot’ and the message from the markets via fed funds futures reduces the likelihood of monetary policy upending equity markets as we move into the back half of the year.”
KAY HAIGH, GLOBAL HEAD OF FIXED INCOME AND LIQUIDITY SOLUTIONS, GOLDMAN SACHS ASSET MANAGEMENT, NEW YORK:“Today’s meeting confirms that the Fed’s recent hawkish shift was not just about higher energy prices. Despite the recent pullback in oil, half of the members of the FOMC expect rate hikes as soon as this year, reflecting strong labor market and inflation data. Our base case remains that the Fed can just about avoid hikes, but the path is narrow and there will be a high premium on the incoming inflation data.”
STEPHEN COLTMAN, HEAD OF MACRO, 21SHARES, LONDON:
“The committee remains divided, but the hawks have clearly gained ground since the previous meeting, and the committee is perhaps feeling some pressure in the wake of hikes by the Bank of Japan and the ECB. Warsh’s priority will be to achieve as smooth a handover from Powell as possible, and the recent collapse in oil prices will have been most welcome in this regard. Despite the hawkish tilt in the statement, the Iran deal does ease the pressure on the Fed and provides breathing space for Warsh to establish himself with the media in a calmer environment.”
PHIL BLANCATO, CHIEF MARKET STRATEGIST, OSAIC, NEW YORK:
“Kevin Warsh is making his debut as chairman of the Fed in a tough moment for the Fed, when inflation is once again on the rise. Inflation is above the Fed’s 2% target, with it being 4.2% at the end of May, its highest level in three years.
“The labor market remains strong, meaning there is no need for a cut. I’d anticipate the Fed to hold rates here for the foreseeable future.
“Christopher Waller stated they should remove ‘easing bias’ language from Fed Policy. This is a bearish interest rate move, suggesting that the next move for rates does not have to be down. There is a 98% chance of a hold right now and markets will be more tuned into the Fed’s comments.”
TOM GRAFF, CHIEF INVESTMENT OFFICER, FACET, PHOENIX, MARYLAND:
“While the Fed officially made no changes to their rate target today, there has clearly been a big shift. The most notable was the dot plot, where half of FOMC members penciled in at least one hike for the remainder of 2026, while only one member favored a cut. That’s a marked change from the last dot plot where the median forecast was for cuts.
“We also got our first taste of how Kevin Warsh will handle communication. The post-meeting statement was much more concise, and included only a cursory discussion of the economy. In terms of future rate decisions, the statement only said that ‘The Committee will deliver price stability.’
“Overall, this is clearly a bit more hawkish than the market was expecting.”
BRIAN JACOBSEN, CHIEF ECONOMIC STRATEGIST, ANNEX WEALTH MANAGEMENT, BROOKFIELD, WISCONSIN:
“Warsh turned the table over in the Eccles Building with a radical simplification of the Fed’s policy announcement. By doing this, he’s actually inviting more Fed-speak, not less. Now every Fed President will fill the gap left by the punchy policy announcement. This may backfire on Warsh.”
RYAN DETRICK, CHIEF MARKET STRATEGIST, CARSON GROUP, OMAHA, NEBRASKA:
“It doesn’t look like Warsh rocked the boat too much with his first meeting in charge. The realization is inflation has clearly been heating up, but the other side is the economy has been fairly firm as well. The chances are, as was widely expected, that there’s probably not going to be a rate cut this year. This further confirms that. Now the question becomes, will we really see a hike or is the Fed on pause the rest of this year?”
MATTHIAS SCHEIBER, HEAD OF THE MULTI-ASSET TEAM AT ALLSPRING GLOBAL INVESTMENTS, LONDON:
“The consumer has surprised to the upside, maintaining robust growth of around 2% quarter over quarter but with a falling savings rate. Growth expectations have begun to reprice higher, with investment and consumption both balanced nicely. Inflation, on the other hand, has proved stubborn and is likely to continue to pick up from here. Tariff uncertainty remains, including a small left tail risk that a ‘resolution’ in the geopolitical backdrop could open a flood of demand.
“The Fed’s balance sheet remains a central question and will increasingly be in focus over the next few Fed meetings. Markets will continue to watch the chair as he implements his vision for the FOMC, which may see subtle shifts in the communications process and provisioning of data. The market will be keenly looking for these signals.”
KARL SCHAMOTTA, CHIEF MARKET STRATEGIST, CORPAY, TORONTO:
“This Fed decision was short, but not sweet. Kevin Warsh moved swiftly to put his stamp on the central bank’s communication strategy by executing a dramatic revision to the official statement, wiping out anything resembling forward guidance and editing out the bulk of the contextual information typically parsed most closely in financial markets.
“The committee turned sharply hawkish, with the median participant yanking inflation projections much higher—suggesting that officials don’t expect this weekend’s US-Iran deal to result in a serious easing in price pressures—and penciling in at least one hike this year, marking a stark contrast with the cut previously expected.”
MARK HACKETT, CHIEF MARKET STRATEGIST, NATIONWIDE INVESTMENT MANAGEMENT, PHILADELPHIA:
“So far, as expected – incrementally hawkish with a less detailed statement. Initial market reaction has not meant much in the past several years. We will need to wait for the press conference. They telegraphed the significant changes to the statement, and dropping the easing bias was expected. It’s interesting that gold is having the most significant reaction to what should not have been a surprise.”
(Reporting by Caroline Valetkevitch, Saeed Azhar, Suzanne McGee, Laura Matthews, Stephen Culp, Chibuike Oguh, Saqib Ahmed; editing by Colin Barr)
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