I've Got a Committee For That

What happened

The Federal Open Markets Committee (FOMC) left the target range for the Federal Funds Rate unchanged at 3-1/2 to 3-3/4 percent.

The Fed's commitment to "deliver price stability" was explicitly reiterated in a shortened Statement that we read as modestly hawkish. The Chair's desire to return inflation to target and enhance the Fed's credibility on its inflation mandate was repeatedly emphasized throughout his press conference.

"Forward guidance" was dropped. The Fed will no longer attempt to "steer" markets regarding the direction, pace, or degree of future interest rate decisions.

The scheduled Summary of Economic Projections (SEP) was published, but its contents were downplayed in line with the move away from forward guidance. Breaking from recent practice, Warsh did not submit his own economic projections or "dots" indicating his modal forecast of the path of the Fed Funds Rate. In the press conference, he hinted more than once that by the end of the year, the SEP will likely be significantly altered or dropped entirely.

Nonetheless, the dots showed that half of the committee believes that the policy rate will need to rise by the end of 2026, affirming that the committee is mindful that this week's ceasefire alone does not mitigate underlying inflationary pressures. The median projection for the policy rate now sits at 3.8% at the end of 2026 (one hike, up from one cut in March) and 3.6% at the end of 2027 (up from 3.1% in March). To be clear, a ceasefire with Iran is not a sufficient development to bring inflation back to target in the minds of half the committee.

Chair Warsh announced the formation of five new task forces to recommend reforms to almost all elements of monetary policy. Further details, including the members of each task force (who will come from both inside and outside the Fed), their exact remit, and their reporting timelines, were deferred to the next FOMC meeting. Most attempts by journalists to entice some forward-looking commentary from Warsh were met with the refrain "I've got a committee for that."

The five task forces will review:

1. The Fed's communications strategy.
2. The Fed's balance sheet.
3. The production and use of economic data that the Fed relies upon.
4. Production and jobs in a time of technological transformation.
5. The Fed's inflation frameworks.

Almost all elements of monetary policy are under review — the 2% inflation target is out of scope, at least until the Fed re-establishes its credibility in achieving its current mandate.

What it means

1. Kevin Warsh is his own man, with his own vision for the appropriate scope and conduct of monetary policy, and credible independence from Presidential interference. He would not be drawn to comment on his level of contact with the President during the press conference, but his repeated emphasis of the goal to deliver price stability, some balanced (not dovish) comments on the inflationary implications of AI, and his clear focus on credibility-enhancing reforms, all worked to dispel the notion that he's looking for a reason to ease rates under pressure from the White House. Our impression was of a man who knows his term will outlast that of his nominating President, with an ambition to make his mark on economic history.
2. We have entered a phase of institutional reform — the most significant since inflation targeting was developed in the early 1990s. Warsh has cast himself as modernizer-in-chief, enabled by "his task forces". His overarching aim is to materially reform the Federal Reserve. There is the potential for profound change in the relationship between policy communication and market pricing. Much-needed improvements may be achieved, but change brings risk too – both in conception and implementation.
3. Markets will decouple from Fed communications, improving their ability to cleanly price risk. Warsh is clearly of the view that markets provide a more valuable social function when they can focus on pricing true risk and value, rather than policymakers' perceptions.
4. Markets will react more to data and less to Fed officials' speeches. The overall effect on volatility is indeterminate at this stage, but the source of volatility will shift away from the people setting interest rates and toward the data (especially the data they emphasize as being reliable and important).
5. Investors will need to be nimble and intellectually flexible. On some key market-moving debates, investors may be vulnerable to shifting goalposts as the task forces conduct their work. Changes to how the Fed defines certain aims, its preferred data sources, or how it conducts its operations, could have serious consequences for interest rates. Markets need to learn to adjust quickly and guard against reflexive instincts. For example, the Fed may not adjust its 2% target, but the committees on data or inflation frameworks may recommend using a new inflation series as the benchmark, which could, in turn, imply a different interest rate than the old benchmark.

Coming in the same week as a promising step toward reopening the Strait of Hormuz, the potential reforms at the still-hawkish Fed have shifted the outlook for the second half of 2026.

We will update our near-term and scenario-based outlook in this week's regular note.