The Federal Reserve held interest rates steady at 3.5%-3.75% at the conclusion of its first meeting under new Chair Kevin Warsh, but signaled a potential rate hike later this year as inflation remains elevated. The decision was unanimous, marking the fourth consecutive meeting the central bank has kept rates unchanged.
The Fed’s updated projections released Wednesday showed the median federal funds rate estimate for year-end 2026 rose to 3.8%, up from 3.4% in March. That shift suggests at least one rate hike is now on the table, a stark reversal from earlier expectations that the Fed would cut rates in 2026.
Nine Fed officials indicated they expect rates to increase by year’s end, according to the summary of economic projections. The committee also removed language from its post-meeting statement that had signaled an easing bias, reflecting a shift away from the assumption that rate cuts were the Fed’s next move.
During his first press conference as chair, Warsh repeatedly emphasized the Fed’s commitment to “price stability,” signaling that he intends to prioritize fighting inflation over accommodating the low-rate expectations that many had associated with his nomination by President Donald Trump.
The market reaction was swift and negative. The Dow fell 507.12 points, or 0.98%, after earlier hitting a fresh all-time intraday record. The S&P 500 lost 1.21% to close at 7,420.10, while the Nasdaq Composite shed 1.34% to settle at 26,021.66. Major tech stocks including Microsoft, Meta Platforms, Alphabet, and Amazon all closed in the red.
Treasury yields surged following the decision, with the 2-year yield gaining more than 16 basis points to 4.216%. The sharp move reflected investor concerns about a prolonged period of elevated rates and the potential for additional tightening if inflation fails to cool.
Claudia Sahm, chief economist at New Century Advisors, attributed the market decline to the hawkish shift in the Fed’s projections. “The market reaction at this point is largely to the dot plot being much more hawkish,” Sahm said on CNBC. “The wind has changed a lot in terms of the inflation picture.”
The Fed’s statement noted that “economic activity is expanding at a solid pace” and that “job gains have kept pace with the workforce.” However, the committee highlighted “elevated uncertainty” stemming from the Middle East conflict and persistent price pressures as reasons for its more cautious stance on future rate cuts.
Warsh also announced five task forces aimed at overhauling major Federal Reserve operations, including changes to communications and balance sheet policies. The new chair has previously indicated his skepticism of extensive forward guidance, which he views as constraining the Fed’s flexibility.
Jeffrey Gundlach, CEO of DoubleLine Capital, told CNBC that Warsh’s messaging made clear he would not follow the path of easy monetary policy many had expected. “He is absolutely telling you that he plans on delivering on price stability,” Gundlach said. “So that means we’re not going to have such easy money policy as everybody thought.”
Sources
- CNBC — Dow closing figures, S&P 500 and Nasdaq losses, Treasury yield movements, Warsh press conference statements, analyst commentary from Claudia Sahm and Jeffrey Gundlach
- Stock Titan — Fed rate decision details, dot plot median rising to 3.8%
- CP24 — Nine Fed officials anticipating a hike in 2026, removal of easing bias
- Kiplinger — Forward guidance changes and Warsh’s disapproval of forward guidance
