A Warsh-led Fed begins with no change in rates
The FOMC voted unanimously to maintain the range of the federal funds rate at 3.50-3.75% following Kevin Warsh’s first meeting as Fed Chair.
That decision matched both the consensus and our own pre-announcement expectations. Even so, the dollar found some support, with updated communications seen as leaning hawkish at the margin. As we write following the conclusion of the press conference, swaps now fully price a rate rise by October. We continue to think that no change in rates is more likely in the coming months, albeit that call will remain under review as FOMC communication continues to evolve under the Fed’s new leadership.
Indeed, our big takeaway from this latest meeting largely centres on changes in how the Fed conducts and communicates policy, rather than any immediate shift in monetary stance.
The policy statement was notably pared back, Chair Warsh declined to submit any estimates to the Summary of Economic Projections, and announced the creation of five task forces to study key areas for reform, including communications and the Fed’s balance sheet. This is all largely in keeping with the previously telegraphed views of the Chair, and how this will ultimately impact markets remains uncertain. But the direction of travel would seem to favour little to no forward guidance at upcoming meetings, which we are inclined to think increases the prospect of volatility around these events, all else equal.
For now, though, traders are taking a steer from the updated dot plot, which showed half of the 18 submissions indicating a rate hike in 2026.
This was more hawkish than had been predicted by economists, and has seen swap markets accelerate rate increase expectations. Given the prospect of changes to the conduct of policy over the coming months, and a fast-evolving situation in the Middle East, we think the move to ramp up hiking bets is somewhat premature. Nonetheless, with little pushback from Warsh in his press conference, rising rate expectations are fuelling a dollar bid post-meeting, with the DXY up close to 1% relative to pre-decision levels, albeit helped by a social media post from the President throwing into doubt prospects for USMCA renegotiation for good measure.