Federal Reserve removes easing bias, policymakers see a hike as more likely than a cut this year
The knee-jerk move for stocks was to the downside.
In an incredibly brief statement, the Federal Reserve voted to keep rates unchanged at a range of 3.5% to 3.75%, as was universally expected.
The release eliminated any hints as to the future for policy rates. Its April statement included the phrase “in considering the extent and timing of additional adjustments to the target rate,” which was a nod to the idea that another cut was more likely that a shift towards hikes.
At that time, three monetary policymakers dissented, preferring that this easing bias be removed. Today’s unanimous vote suggests that members are aligned on this matter, given the renewed strength in labor market data since May and stickiness of inflation.
Of course, hints on the outlook for short-term rates can still be divined through the dot plot, and that came out on the hawkish side:
The median Fed official thinks the policy rate should be at 3.75% if the economy evolves in line with their expectations, which implies a hike is seen as more likely than a cut. Wall Street had anticipated that the 2026 dot would rise to only 3.625% from 3.375%.
The 2027 dot was even higher relative to estimates at 3.625% versus analysts’ calls for 3.375%, and up 50 basis points from March.
Expectations for core PCE inflation this year were also revised up dramatically to 3.3% from 2.7% one quarter ago.
The SPDR S&P 500 ETF and Invesco QQQ Trust sold off following the statement and projections; Treasury yields rose. Stocks pared some of their losses during new Chairman Kevin Warsh’s press conference.
Prediction markets now see a hike in July as more likely than a cut, a reversal of what was priced in ahead of this event. However, the odds overwhelmingly favor a hold as the most likely outcome.
However, prediction markets now see a great risk of an interest rate hike before the year is out, with those odds rising to about 50% from roughly 40%.
(Event contracts are offered through Robinhood Derivatives, LLC — probabilities referenced or sourced from KalshiEx LLC or ForecastEx LLC.)
Warsh has often suggested that the central bank over-communicates with markets, and his proclivity for brevity appears is reflected in today’s press release. During the press conference, he positioned himself as a reformer, outlining different task forces he’s establishing in an attempt to improve the conduct of monetary policy and economic outcomes.
“Warsh has come out swinging with a short statement and he did not submit a forecast,” writes Neil Dutta, head of US economics at Renaissance Macro Research. “That the statement concludes by noting that the FOMC will deliver price stability reminds me of the single-mandate stuff from Paul Ryan.”
