BY: Matthew Kimbrough
Senior Portfolio Manager
Fed Chair Warsh Sets the Stage for Sweeping Reforms
In his first FOMC meeting as Fed Chair, Kevin Warsh presided over an FOMC committee that decided unanimously not to amend their current stance on monetary policy (i.e., no change to the present range for the Fed Funds rate). However, he presented a barrage of potential reforms to both the practices of the Fed Chair and the Federal Open Market Committee.
Warsh essentially scrapped the previous Official Statement in favor of a curt, 4-paragraph revision revealing only the essentials.
His prepared remarks prior to the press conference shed light on the extent of reforms that he has envisioned. As a part of this reform-oriented agenda, he established a new Task Force in each of the following 5 areas – Fed Communications, the Fed’s Balance Sheet, the Use and Reliance on Existing Data Sources, Productivity and Jobs, and Inflation Frameworks. These committees will be comprised of economists, top researchers, and other Fed subject matter experts. Each committee is to start with first principles, examine current practices, examine alternatives, and ultimately propose changes. The five Task Forces are to begin work within the next couple of weeks, and ideally, they will conclude their findings by year-end.
Warsh did not submit his own economic projections as part of this meeting’s SEP. Furthermore, the SEP itself is under review by the Fed Communications task force.
The practice of providing so-called “forward guidance” is to be eliminated. Warsh also mentioned that press conferences are useful, but only when you know that you have something to say.
Several times, Warsh reaffirmed that the Fed is committed to its 2% long-term inflation objective. This objective is outside the scope of the planned reforms, and price stability is the Fed’s number one goal.
The press conference itself was also shorter, with 15 questions and follow-ups fielded by the Fed Chair instead of the usual 20 questions.
The Decision
At the conclusion of today’s FOMC meeting, the Fed Funds rate was held steady at the current range of 3.50%–3.75%.
Today’s decision was the first unanimous decision since November 2024.
The Statement
Further “strike-through” comparisons will use the following statement as a baseline. The new Official Statement now reads as follows:
The Federal Open Market Committee approved the following statement for release by a 12-0 vote:
The Committee decided to maintain the target range for the federal funds rate at 3.5% to 3.75%, in support of the Fed’s dual mandate. The Committee reaffirmed its policy of maintaining ample reserves in the banking system.
Economic activity is expanding at a solid pace despite elevated uncertainty that owes, in part, to the conflict in the Middle East. Productivity growth and capital investment are strong. Job gains have kept pace with the workforce, and the unemployment rate has changed little.
Inflation remains elevated relative to the Committee’s 2 percent goal, in part reflecting supply shocks that have driven price increases in certain sectors, including energy. The Committee will deliver price stability.
New Economic Projections
Fed Chair Warsh did not submit his own projections. Additionally, he called for a formal review of the SEP and other Fed communications. The most significant aspects of this quarter’s Statement of Economic Projections (SEP) document are highlighted below.
1|The median Dot Plot projection now shows one 25bp rate hike in 2026, with 9 participants projecting at least one rate hike.
2|Core PCE inflation expectations for year-end 2026 were raised significantly, from 2.7% to 3.3%. Expectations for Core PCE inflation were also raised 0.1% in 2027.
3|Real GDP is expected to be 2.2% for 2026, 0.2% lower than projected in March. 2027 GDP projections are unchanged.
4|Year-end unemployment expectations declined 0.1% to 4.3%.
The Market Reaction
Prior to the release of the Fed’s Official Statement, Treasury yields were relatively flat. However, the 2-year Treasury yield jumped 9bp after the statement was released and a further 4-5bp after Warsh’s press conference. Interestingly, this move transpired almost exclusively across the front end of the curve, creating a bear flattener. The 2s-10s curve moved from +39 to +29bp. Corporate bond spreads tightened today by 2-3bp, especially across financials.
Not Investment Advice or an Offer | This information is intended to assist investors. The information does not constitute investment advice or an offer to invest or to provide management services. It is not our intention to state, indicate, or imply in any manner that current or past results are indicative of future results or expectations. As with all investments, there are associated risks and you could lose money investing.
