The Federal Reserve, under new Chair Kevin Warsh, left its target interest rate unchanged at 3.50%-3.75% in a unanimous 12-0 vote, marking a departure from the previous 8-4 split in April and removing any easing bias from its policy statement. The Fed's updated Summary of Economic Projections (SEP) delivered a distinctly hawkish message, sharply raising the median 2026 federal funds rate projection to 3.8% from 3.4% in March and lifting the 2026 Personal Consumption Expenditures (PCE) inflation forecast to 3.6% from 2.7%. Core inflation was also revised higher, with the Fed now seeing inflation returning to its 2% target only in 2028 [1][2][3][4].
Warsh's first press conference as Chair reinforced the hawkish stance, emphasizing the Fed's unanimous commitment to restoring price stability and announcing the launch of five task forces to review key aspects of Fed operations, including communications, the balance sheet, data sources, productivity and employment, and the inflation framework. Warsh signaled that changes to the SEP and a new communications framework could be introduced by year-end, suggesting a move away from forward guidance and possibly the dot plot itself [1][2][3][4].
The market reaction was swift and pronounced. The Dow Jones Industrial Average (DJIA) reversed from a record high, dropping roughly 480 points from its intraday peak to a session low near 51,800 before stabilizing modestly lower. Rate-sensitive growth stocks led the decline, with the Nasdaq Composite and Russell 2000 both down close to 1% at their worst. The US Dollar Index (DXY) surged, breaking above the 100.00 handle, while EUR/USD fell nearly 60 pips, slicing through 1.1550 and approaching 1.1500 as traders digested the hawkish shift and the prospect of higher US rates [2][3][4].
Market expectations for future rate hikes repriced rapidly. According to the CME FedWatch tool, the probability of a rate hike by September is now roughly a coin flip, rising toward 60% by October, and about three quarters of traders anticipate higher rates by December. The focus has shifted from the timing of rate cuts to the likelihood and timing of the next hike, with the Fed's higher-for-longer stance seen as a tailwind for the Dollar and a headwind for equities and the Euro [3][4].
The Fed's updated projections and Warsh's reform agenda signal a significant shift in US monetary policy, with inflation now viewed as a more pressing concern than economic weakness. The removal of forward guidance and the potential overhaul of the SEP introduce additional uncertainty for markets, as the central bank seeks to adapt its communication and policy tools to a more volatile economic environment [1][2][3][4].
CONCLUSION
Kevin Warsh's debut as Fed Chair marked a hawkish pivot, with sharply higher inflation and rate projections rattling equity and currency markets. The Fed's commitment to price stability and the prospect of operational reforms have shifted market expectations toward further tightening, boosting the Dollar and pressuring risk assets. Investors now face a more uncertain policy landscape as the Fed signals a move away from forward guidance.