In its first meeting under new Federal Reserve Chair Kevin Warsh, the Federal Open Market Committee held its benchmark rate steady, reflecting growing concerns about inflation among bank officials.
All 12 voting members of the committee agreed to hold rates steady in a range of 3.5% to 3.75%, the first time in a year there was no dissent.
About half of the officials at the two-day meeting forecast at least one interest rate increase this year. A notably brief post-meeting statement released by the Fed eliminated a section found in previous statements that reflected a bias toward cutting rates in the future, further highlighting the hawkish concern about elevated inflation. (For an analysis of the large amount of text cut from previous Fed statements, see this New York Times graphic.)
Speaking to reporters at his first press conference as chair, Warsh vowed to deliver price stability. “Persistently high prices are a burden for the American people, but the recent past need not be prologue,” Warsh said. “The commitment to deliver is strong, unanimous and unambiguous.”
Still, it may take some time to bring inflation down to the Fed’s 2% target rate. Projections from Fed officials show inflation not falling back to that level until 2028.
Warsh plans updates: The new Fed chief has promised “regime change,” and on Wednesday he announced the creation of new internal committees that will review the way the central bank operates. The committees will focus on five areas: communications, the bank’s balance sheet, data sources, productivity and jobs, and the central bank’s “inflation frameworks.”
Warsh may have delivered the first part of his regime change in the Fed post-meeting statement, which did not include any information about the likely course of monetary policy. “We’ve dropped forward guidance,” Warsh said. Some Fed officials “think as a general proposition forward guidance isn’t the business we should be in.”
Warsh also repeated his long-held belief that inflation is a direct product of central bank policy. “I’ve said for years inflation is a choice,” he said.
At the same time, Warsh rejected the idea that the Fed’s dual mandate to provide price stability and maximum employment contains a deep tension in which one goal sometimes conflicts with the other.
“I don’t believe that we have a cruel choice,” Warsh said. “I don’t share the view that was expressed a few generations ago that Federal Reserve chairmen show up at a podium and say you’ve got to choose. And you’re going to have to decide whether you’re willing to tolerate higher inflation to put more people at work. I don’t believe in that. What I believe is if we do our job, we can make strong growth, low prices and strong employment mutually compatible.”
Warsh then repeated his vow to stabilize prices, making it clear that is his primary concern.
What analysts are saying: Stocks tumbled and interest rates rose Wednesday as investors reacted to a Fed that has grown more hawkish on inflation.
“The big news is that nine FOMC members believe it would be appropriate to tighten policy before the end of this year,” said Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics, in a note to clients. “We expected only three members to anticipate hiking.”
Tombs added that recent inflation data, which showed prices continuing to rise, was likely “the final straw for some members,” pushing them to take a more hawkish stance.
Tombs also highlighted the fact that, unlike all the other Fed officials, Warsh did not provide his own interest rate forecast. “This was a good move politically,” he wrote. “Mr. Warsh would have attracted criticism for being the President’s stooge and unable to influence the rest of the Committee if he alone had forecast a rate cut, while forecasting no change in policy would immediately have incurred the wrath of the White House.”
Krishna Guha, head of central bank strategy at Evercore ISI, noted that before he was nominated by President Trump, Warsh was known as an inflation hawk — quite different from Trump, who has long called for lower interest rates, regardless of inflation. “New Fed Chair Warsh sounded a bit like old hawkish Fed governor Warsh at his press conference today repeating multiple times the need for the Fed to deliver on its mandate for price stability,” Guha said, per CNBC.
The bottom line: Fed officials are increasingly concerned about inflation but are holding rates steady for now under their new leader as they wait to see how the economy evolves before their next meeting at the end of July.