Kevin Warsh's First FOMC: 'Easing Bias' Removed, Price Stability Takes Center Stage (Comprehensive)

Plans to Scale Back Forward Guidance, Reexamine Dot Plot
June PCE Median Projection Rises to 3.6%
Emphasis Shifts from Dual Mandate to 'Price Stability'
AI Investment Boom Seen as Driving Demand and Inflationary Pressure

The Federal Reserve (Fed) kept its benchmark interest rate unchanged for the fourth consecutive time at the first Federal Open Market Committee (FOMC) meeting under the new chairmanship of Kevin Warsh. However, the Fed made a clear shift toward a hawkish (monetary tightening) stance by removing its previous “easing bias,” which had hinted at the possibility of rate cuts, and by emphasizing its commitment to price stability.

At his first press conference, Chair Warsh announced plans to scale back forward guidance and to review the dot plot (interest rate projections). He noted that while the current investment boom in artificial intelligence (AI) could boost productivity in the long term, for now, it is primarily increasing demand and fueling inflationary pressures by driving up investment in data centers and power infrastructure.

June FOMC Statement. Federal Reserve (Fed)

On June 17 (local time), the Fed announced after its regular FOMC meeting that it would maintain the benchmark interest rate at the current range of 3.50–3.75% per year. This decision was unanimous, with 12 members in favor and 0 against, in contrast to the previous April meeting, where four members voted in opposition.

At that time, Fed Governor Stephen Miran advocated for a rate cut, while Beth Hammack, President of the Federal Reserve Bank of Cleveland, Neel Kashkari, President of the Federal Reserve Bank of Minneapolis, and Lorie Logan, President of the Federal Reserve Bank of Dallas, objected to retaining the “easing bias” language.

The most notable change in this statement was the removal of policy signals. The phrase “additional adjustments,” which had remained in the March and April statements, was omitted, signaling that the Fed is no longer leaving the door open for possible rate cuts.

Instead, the Fed stated, “Inflation partly reflects supply shocks that have led to price increases in some sectors, including energy, and remains above the Committee’s 2% objective,” adding, “The Committee will deliver price stability.”

Unlike the March and April statements, which emphasized a strong commitment to supporting maximum employment and returning inflation to the 2% target, this time the message of price stability was placed front and center.

The assessment of the labor market also changed. Whereas in March and April the Fed said that “job gains have remained at low levels,” this time it said that “job gains have been in line with the pace of labor force growth.” This reflects diminished concerns about a slowdown in hiring, but a continued view that inflationary pressures remain high. Regarding economic activity, the Fed said, “Despite elevated uncertainty partly resulting from the conflict in the Middle East, economic activity continues to expand at a solid pace.”

Warsh Refuses to Submit Dot Plot... Half of Members Expect at Least One Rate Hike This Year

June FOMC Dot Plot. Fed

The dot plot also turned more hawkish. According to the updated Summary of Economic Projections (SEP) released that day, of the 18 members who submitted rate forecasts, nine anticipated at least one rate hike this year, eight expected rates to be held steady, and only one projected a rate cut. This marks a significant shift from the March projections, when virtually no members anticipated a rate hike within the year. The median forecast for the benchmark rate at the end of 2026 rose to 3.8% from 3.4% in March, reflecting the possibility of one rate increase this year.

Inflation forecasts were also raised significantly. The median 2024 Personal Consumption Expenditures (PCE) inflation forecast by Fed officials jumped from 2.7% in March to 3.6% in June. The core PCE forecast was also raised from 2.7% to 3.3%. In contrast, the unemployment rate projection was revised down from 4.4% to 4.3%. The combination of higher inflation and a more robust job market is one reason the Fed is leaving the door open for further tightening rather than rate cuts.

Chair Warsh publicly disclosed at the press conference that he did not submit a dot plot projection himself. He said, “The dot plot does not help with policy implementation,” and added that he did not hear “strong conviction” from other members regarding their forecasts. He also explained that members’ projections are “written in pencil, with a big eraser,” indicating how quickly they can change. This was a warning against markets treating the dot plot as a firm commitment from the Fed.

He also clarified the reduction of forward guidance. Chair Warsh said, “We have eliminated forward guidance,” explaining that it is not appropriate in the current policy environment to pre-announce the path of future interest rates. His view is that rather than speculating about the Fed’s next move, markets should respond to actual economic data. He pointed out that if market prices simply mirror Fed statements, the central bank could lose access to important information.

Fed Remains Cautious on Rate Hikes... Launches Task Force to Improve Communication

Kevin Wash, Fed Chair Nominee_AP Yonhap News

However, Chair Warsh did not signal an imminent rate hike. He said that only one proposal was discussed at this meeting and that no one among the 19 members saw a need for a rate increase or even a warning about a possible hike. This means that although the dot plot shifted hawkishly, a near-term rate hike, such as at the July meeting, is not a foregone conclusion. Chair Warsh stated, “We will meet again in six weeks,” maintaining that upcoming decisions will depend on incoming data.

Another hallmark of the Warsh era is a comprehensive review of the Fed’s operating procedures. He announced that five task forces would be launched, covering communications, the balance sheet, economic data, productivity and employment, and the inflation framework. In particular, the communications task force will review all of the Fed’s means of communication, including the statement, press conference, dot plot, and minutes.

However, the 2% inflation target itself will not be subject to review. Chair Warsh said, “There is no reason to revisit the 2% inflation goal until we have reestablished the resolve and capability to achieve it.” He reaffirmed the existing stance that “inflation is primarily determined by monetary policy” and that “inflation is a choice.” This underscores the idea that, despite supply shocks such as oil prices and war, the ultimate responsibility for price stability rests with the Fed.

AI Investment Poses Short-Term Inflationary Pressures

Regarding AI, Warsh expressed the view that while it could boost productivity in the U.S. economy over the long term, in the short term, it may add to inflationary pressures by increasing investment demand.

In response to a question from Nick Timiraos of The Wall Street Journal—“Does AI investment contribute more to demand or supply?”—Warsh replied, “The demand side is, without a doubt, being reflected in GDP figures,” but added, “The timing and scale of supply-side growth are more uncertain.”

He further explained, “There is a race between supply and demand.” In other words, while the AI investment boom is currently driving data center and power infrastructure investments that increase demand and inflationary pressures, the productivity-driven supply expansion effects are still uncertain in terms of timing and scale.

Meanwhile, the market interpreted Warsh’s first FOMC as hawkish. The yield on the U.S. 2-year Treasury note rose immediately after the decision, the dollar strengthened, and the stock market declined. The interest rate futures market also began to price in a higher likelihood of a rate hike this year.

This content was produced with the assistance of AI translation services.