June Fed recap: Warsh opens with a rate-hold and a new Fed playbook

• The Fed held rates at 3.50%–3.75%, but the meeting marked a communication reset under Warsh.
• The Fed’s projections turned more hawkish, with higher 2026 inflation and funds-rate expectations.
• Warsh did not submit his own dot and signalled that the quarterly projections and dot plot may be reviewed, reducing its value as forward guidance.
• Inflation remains too high for cuts. Trimmed-mean measures, which Warsh has highlighted, look less severe than headline or core inflation but still do not provide a clear case for near-term easing.
• We continue to favour short-duration exposure, while staying selective in medium-term bonds and cautious on long-duration bonds.

Fed Funds Rate unchanged, but with a shorter Fed statement

The US Federal Reserve (Fed) left the target range for the Fed Funds Rate unchanged at 3.50% - 3.75%. The decision was unanimous. The Fed also reaffirmed its policy of maintaining ample reserves in the banking system, with no immediate changes to balance-sheet policy, although Warsh left room for a broader review in future.

The statement was much shorter than previous statements under Powell. The Fed continued to note that economic activity is expanding at a solid pace despite elevated uncertainty, while unemployment remained little changed. It also reiterated that inflation remains elevated, citing supply- and energy-related shocks.

The notable addition was the reference to strong productivity growth and capital investment. This is consistent with themes Warsh had discussed previously and later reiterated in the press conference, particularly around AI, productivity and the economy’s supply capacity.

Fed’s quarterly projections: Inflation and rate expectations higher, but with a catch

There was a caveat with the latest Fed projections: Warsh did not submit his own projections, citing his long-standing objection to the existing format. He also noted that many participants made their projections with ‘pencils’ and ‘big erasers’, underscoring the significant uncertainty around the outlook and the possibility that these projections could change quickly.

The inflation projections reflected the effects of the Middle East conflict and the recent rise in energy prices. The median 2026 PCE inflation projection rose from 2.7% to 3.6%, while core PCE inflation was projected at 3.3% (up from 2.7%). Looking at the distribution of projections, policymakers expect inflation to remain stubbornly elevated through at least 2026, with some persistence into 2027. Longer-run projections, however, were little changed.

Growth and unemployment projections were less alarming. Median real GDP growth for 2026 was projected at 2.2%, down from 2.4%, while the unemployment rate was projected at 4.3%, compared with 4.4% previously. In other words, the Fed is not forecasting a sharp deterioration in the US economy or labour market.

The dot plot turned more hawkish. The median Fed Funds Rate projection for end-2026 now stands at 3.8%, from 3.4% previously, broadly consistent with no cuts and a meaningful risk of hikes this year. Among the 18 participants who submitted projections, eight projected no change, one projected a cut, and nine projected rates above current levels by year-end. Furthermore, eight of the 18 participants continued to forecast a policy rate at or above today’s level by end-2028.

Overall, while the latest projections lean hawkish, we would avoid reading them as a firm policy signal. Much of the shift appears to reflect already-known economic data, particularly the deterioration in the inflation outlook, rather than a clear pre-commitment to tighter policy. Moreover, Warsh’s own reservations about the SEP, reflected in his decision not to submit a projection and his plan to review how these projections are communicated, reduce the dot plot’s value as forward guidance. We therefore view the projections as evidence of higher inflation and policy uncertainty, rather than a definitive signal that rate hikes are imminent.

Press conference highlights: Expect less guidance and more reform at the Fed

In our view, the first policy statement under Warsh and his subsequent press conference were more important than the rate decision itself. After all, the rate hold had already been widely expected by markets.

First, Warsh re-emphasised the Fed’s inflation objective. He said the FOMC remained ‘unambiguous and unanimous’ in its commitment to deliver price stability. He also noted that inflation has been above the Fed’s 2% goal for more than five years, and that high prices remain a burden for households.

Second, the press conference marked the end of forward guidance - markets should no longer expect the Fed to provide clear hints on the next few meetings. Warsh said the FOMC statement was deliberately shorter and simpler, and argued that financial markets work better when they react to real economic data rather than trying to anticipate how the Fed will react to that data. In practice, this means future economic releases could drive larger moves in yields as markets have less uncertainty on each datapoint’s weight in the Fed’s reaction function.

Third, Warsh delivered a message of institutional reform, with five new task forces covering:

1. Fed communications: We expect less forward guidance and more reliance on market reactions to incoming data, in line with Warsh’s philosophy. Potential changes include the Fed’s quarterly projections, meeting transcripts and press-conference format.
2. Balance sheet review: This could materially affect the long end of the UST curve. Warsh has repeatedly argued that the Fed’s balance sheet is too large. If the Fed eventually reduces its balance sheet more aggressively, it could put pressure on longer-tenor bond prices even if policy rates remain unchanged.
3. Data sourcing and methodologies: This suggests the Fed may look at more real-time and potentially alternative data sources. While this could improve policy responsiveness, it could also make the Fed less predictable if markets cannot easily identify which data sources matter most.
4. Productivity and jobs including AI: This is the most potentially dovish element of Warsh’s framework. If AI raises productivity significantly, the economy may be able to grow faster without triggering excessive inflation, giving the Fed more room to lower policy rates over time.
5. Inflation framework: While details remain limited, we think this could be a precursor to Warsh placing more weight on alternative inflation measures. These include trimmed-mean or median inflation measures, which strip out extreme price moves. Warsh had previously said in his confirmation hearing that he preferred trimmed-mean estimates.

Recent US inflation figures continue to put pressure on Fed's mandate

Recent inflation readings remain elevated, and point toward further caution from the Fed. May CPI showed renewed inflationary pressures, with headline CPI re-accelerating to 4.2% y/y in May (April: 3.8%) and monthly CPI rising 0.5% m/m. The increase was heavily driven by energy, which rose 23.5% y/y and 3.9% m/m. Core CPI was slightly less alarming, though it still increased to 2.9% y/y in May (April: 2.8%). Shelter CPI remained sticky at around 3.4% y/y (April: 3.3%).

April PCE inflation showed a similar story and remained too firm for the Fed’s comfort. Headline PCE accelerated from 3.5% to 3.8% y/y, while core PCE also edged up from 3.2% to 3.3% y/y. Energy was again an important driver, with PCE energy goods and services rising sharply.

Trimmed-mean inflation measures – Warsh’s preference – technically presented a less hawkish picture, especially on the PCE side. The Dallas Fed’s trimmed-mean PCE was 2.3% y/y in April, much closer to the 2% target than headline or core PCE. However, the Cleveland Fed’s 16% trimmed-mean CPI stood at around 2.9% y/y in May (3.2% annualised m/m), suggesting the picture might not be as clear – one’s interpretation of the inflation situation might depend heavily on the exact measure used.

(Note: Trimmed-mean measures strip out the most extreme price moves each month, rather than mechanically excluding food and energy regardless of their volatility. The 16% trimmed-mean CPI removes the bottom 8th and top 8th percentiles of the distribution.)

We are cautious on over-interpreting the (more benign) trimmed-mean inflation readings. We think there are risks that energy shocks could feed into broader price pressures beyond the energy bit of the inflation basket, including through second-order effects like transportation and logistics, travel costs, and food costs. A broadening of price pressures would eventually push trimmed-mean readings upward, closer to headline and core inflation today.

Overall, current inflation data support a continued cautious Fed stance given Warsh's renewed commitment to inflation fighting. Inflation remains too high for the Fed to ease confidently, especially after many years of above-target inflation. Even under a more optimistic reading based on trimmed-mean inflation, ‘underlying’ inflation remains above 2% and is vulnerable to broader second-round effects. In our view, we still do not expect rate cuts from the Fed and see room for rate hikes as inflation continues to prove persistent. We think the Fed would need very clear evidence of meaningful dis-inflation before shifting policy in a dovish direction - something that is not seen today.

What this means for bond markets

The main takeaway from this meeting is that rate cuts still look extremely unlikely in the next few meetings. This is as we have repeatedly said over the past months – with inflation still too high and growth remaining resilient, the Fed is much more likely to at least hold rates, with decent scope for hikes if inflation remains elevated for some time. Warsh’s first meeting appeared designed to re-establish the Fed’s inflation credibility and policy independence. Markets are also pricing in some scope for rate hikes either in 2026 or 2027 (Chart 1).

For the front end, we expect yields to stay better supported at decent levels. Markets are unlikely to price in aggressive cuts now as inflation is expected to remain elevated, with oil and pump prices still well above pre-conflict levels (despite declining over the past weeks). Short-duration and money-market-like products therefore continue to offer attractive yields with relatively low duration risk.

For medium-term bonds, we think the outlook is more balanced with room for careful selection. While we see room for yields to increase (i.e. bond prices to drop) amid ongoing inflation risks, we also acknowledge the steeper curve today, especially within corporate bonds. We encourage careful selection of high-quality issuers, where investors can still potentially benefit from higher spreads and potentially 5+% yields without taking on too much credit risk.

For long-term bonds, we think these remain vulnerable for buy-and-hold investors, and are better suited for active trading. Their longer duration profiles make them susceptible to mark-to-market price movements as investors constantly evaluate the inflation and rates backdrop; this could be further amplified by Warsh’s removal of forward guidance. Furthermore, Warsh’s proposed balance sheet review could result in less support for long-duration assets from a supply-demand perspective, which could exert further upward pressure on long-end yields.

Chart 1: Fed rate expectations - still looking at 1-2 hikes by 2027

Table 1: Fund recommendations

Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold NIL positions in the abovementioned securities. This research report was prepared with the assistance of artificial intelligence (AI) tools. iFAST Financial Pte Ltd does not rely exclusively on AI for content generation; the content of this report – including all investment theses, ratings, price targets and conclusions – has been independently reviewed and verified by the research analyst(s) to ensure accuracy and professional integrity.