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Thought of the day

The Federal Reserve kept the federal funds rate unchanged at 3.50-3.75% for a fourth consecutive meeting, underscoring a cautious stance amid persistent inflation and a still-resilient economy in the US. While the decision itself was widely anticipated, the accompanying guidance and updated projections signaled a more vigilant posture on inflation risks.

The consensus among policymakers shifted in a more hawkish direction, with roughly half of officials anticipating at least one rate increase before year-end. The unanimous vote also reinforces a broad alignment within the Committee around maintaining restrictive policy for longer.

Median rate projections for 2026, 2027, and 2028 were all revised upward, with several officials expecting multiple moves higher, while only a very limited number continues to project any easing over the next year.

Market reaction reflected the hawkish shift with the S&P 500 falling 1.2% to close at 7,420, while 2-year US Treasury yields jumped 13bps to 4.18%. The US dollar index rose by 0.9%, and gold dropped by 0.8% to 4,296/oz.

In addition to the shift in rate expectations, the broader developments from the meeting also shed light on how the Fed is reframing and communicating its policy approach under the new chair.

Forward guidance takes a back seat. The statement removed both the easing bias and forward guidance, reinforcing the idea that the Committee is no longer attempting to guide market expectations explicitly. The post-meeting statement was significantly shortened, offering only a high-level assessment of economic conditions. It described activity as expanding at a solid pace alongside strong productivity and capital investment, while omitting much of the detailed forward guidance that had characterized prior releases. References that previously pointed to potential policy adjustments in either direction were also removed, effectively eliminating any residual easing bias and sharpening the focus on price stability. More broadly, the restructuring of the statement, alongside adjustments to balance sheet implementation and the introduction of multiple internal task forces, points to a deliberate effort to rethink the Fed’s communication and policy toolkit.

The dot plot was more hawkish, but its future as a policy tool is uncertain. Kevin Warsh did not submit rate projections, consistent with his earlier criticism of the dot plot framework, while another participant did not provide longer-term projections. This partial participation highlights growing skepticism toward the dot plot framework and raises questions about its role over time. At the same time, changes in participation likely lowered the threshold for shifts in median projections, contributing to the more hawkish outcome. Still, we expect the policy rate to ultimately move lower, as softer growth conditions in the second half of this year and moderating price pressures should allow the US central bank to make its policy rates less restrictive.

Macroeconomic projections reinforce the Fed’s cautious stance. Growth expectations for 2026 were revised modestly lower, suggesting some softening ahead, while inflation projections were pushed higher, in part reflecting supply-side pressures, including energy-related dynamics tied to geopolitical developments. Both headline and core inflation measures are now widely expected to remain elevated, with overall inflation not returning to 2% until 2028.

Overall, the combination of a new chair regime, hawkish projections, and a wide dispersion of views implies a higher bar for near-term action in either direction. In our view, this points to an extended period of policy on hold, with meaningful adjustments more likely once the task force process is complete, and the Committee has greater clarity on the economic outlook. If supply disruptions tied to the Middle East conflict begin to ease, some of the June meeting’s hawkish tone could fade. Slower growth trends and disinflation in the second half of the year should help support a pivot toward lower policy rates in 2027. As a result, current market conviction around rate hikes in 2026 appears somewhat aggressive, in our view, and we continue to recommend exposure to short- to medium-term duration quality bonds.