Although Warsh’s first FOMC meeting sent a more hawkish signal than expected, Goldman Sachs, Morgan Stanley, HSBC, UBS Group, and Deutsche Bank have all excluded a rate hike from their baseline scenarios. Institutions generally believe that the pro-hike faction within the Federal Reserve has clearly grown stronger, raising policy uncertainty going forward; however, holding steady remains the most likely course of action until inflation deteriorates further or the labor market continues to overheat.
In his first Federal Open Market Committee (FOMC) meeting as Chair, Kevin Warsh swiftly stamped the Federal Reserve with a distinct personal imprint by significantly shortening the policy statement, abandoning forward guidance, and refusing to submit the interest rate dot plot.
The biggest surprise came from the Summary of Economic Projections (SEP): among the 18 FOMC participants who submitted forecasts, nine expected at least one rate hike this year, evenly split with the other nine who projected unchanged or lower rates.
Markets reacted notably hawkishly: following the release of the statement and the press conference, market pricing for the federal funds rate at the end of 2026 rose by approximately 20 basis points in total, the U.S. dollar strengthened, and the Treasury yield curve exhibited a distorted flattening.
Nonetheless, according to Zhui Feng Trading Desk, major institutions including Goldman Sachs, Morgan Stanley, HSBC, UBS Group, and Deutsche Bank all maintained their baseline forecast of no rate changes this year.
Institutions broadly agree that the hawkish faction within the Fed has clearly grown stronger, raising future policy uncertainty; however, barring further deterioration in inflation or sustained overheating in the labor market, holding rates steady remains the most likely path. Meanwhile, all major banks have uniformly raised their assessment of rate hike risks, noting that Warsh’s ongoing review of the policy framework and reform of communication mechanisms are reshaping market perceptions of the Fed’s reaction function.
Institutions maintain their baseline forecast of no action but have increased their assessment of rate hike risks.
Despite the meeting sending a clearly hawkish signal, Wall Street’s major banks have not incorporated a rate hike into their baseline scenario.
Goldman Sachs’ report noted that the risk of a rate hike this year has increased, but its baseline scenario still assumes unchanged rates.
The bank pointed out that if subsequent inflation data proves troubling and job growth remains robust, a majority of participants might support a rate hike; however, it judges that among the 12 voting members, most still lean toward maintaining current rates. Furthermore, geopolitical developments—such as the confirmation of a deal with Iran and the reopening of the Strait of Hormuz—would quickly remove the primary source of upside inflation risks, potentially rendering the current dot plot obsolete in short order.
Morgan Stanley’s report maintains its forecast of no rate changes this year and expects rate cuts to begin in March and June next year, but emphasizes this is a “very close call”—if oil price pressures transmit into core inflation or the labor market tightens further, the Fed will hold off on cutting rates.
HSBC’s report extends its forecast of unchanged rates through the entirety of 2026 and 2027, while noting that the hawkish Summary of Economic Projections (SEP) and stronger inflation language tilt the risks for short-end rates further to the upside, and suggests the U.S. dollar may have already bottomed in 2026.
Deutsche Bank’s report notes that a Federal Reserve less reliant on forward guidance could act with greater flexibility, creating room for rate hikes at upcoming meetings; however, today’s hawkish signals combined with reduced transparency could significantly tighten financial conditions, thereby constraining near-term rate hike capacity.
Dot plot evenly split, with hawkishness exceeding expectations
At the June FOMC meeting, the committee unanimously voted 12–0 to maintain the target range for the federal funds rate at 3.50% to 3.75%. However, the key focus of the meeting lay in the significantly more hawkish shift in economic projections.
This time, nine FOMC participants projected a rate hike in 2026, far exceeding the bank’s previous expectation of three. With Warsh not submitting a dot, the 18 projections formed a 9–9 split: nine participants expected at least one rate hike, including five who anticipated hikes of 50 basis points or more and one forecasting a 75-basis-point increase; eight projected no change in rates, and one still expected a rate cut.
The upward revision to inflation forecasts was equally significant. The FOMC raised its median projection for PCE inflation at the end of 2026 sharply from 2.7% to 3.6%, and core PCE inflation from 2.7% to 3.3%. Deutsche Bank noted that nearly all participants viewed inflation risks as tilted to the upside. Meanwhile, the median forecast for real GDP growth in 2026 was slightly downgraded to 2.2%, and the unemployment rate forecast was marginally lowered to 4.3%.
Morgan Stanley’s report noted that its own forecast for core PCE inflation in 2026 stands at 3.0%, notably below the Fed’s median projection, which serves as a key rationale for maintaining its call for no rate moves this year.
Warsh Press Conference: Hawkish Tone, Rejection of Forward Guidance
Warsh’s inaugural press conference adopted clearly hawkish language but deliberately avoided providing any specific policy path guidance.
On inflation, Warsh repeatedly emphasized that the Federal Reserve "has both the ability and the commitment to achieve its 2% price stability objective" and reiterated that "inflation is a choice." According to Deutsche Bank’s report, he mentioned "price stability" twelve times during the press conference, and the final sentence of the policy statement was simplified to: "The Committee will achieve price stability."
On the labor market, Warsh did not mention any downside risks, stating that employment data is 'moving in the right direction' and adding that 'strong productivity-driven growth is not something we fear—it’s something we welcome.'
According to a UBS Group report, he also noted that the current policy stance is somewhat restrictive for certain sectors—such as housing—but that it would be difficult to describe financial markets using the same language, attributing this 'asymmetry' to differences in the transmission mechanisms of interest rate tools versus balance sheet tools.
Regarding forward guidance, Warsh explicitly stated that he has 'abandoned forward guidance,' arguing that 'financial markets perform best when reacting to actual data, not to how the Federal Reserve might respond to that data.'
He also disclosed that he did not submit a dot plot forecast and expressed reservations about the value of the Summary of Economic Projections (SEP) framework. According to a UBS Group report, he used the term 'working group' as many as 29 times during the press conference.
Five working groups launched; policy framework faces systematic reassessment
Warsh announced the formation of five working groups covering: 1) Federal Reserve communication mechanisms; 2) the balance sheet; 3) the use of and reliance on existing data sources; 4) productivity and employment in an era of transition; and 5) the inflation framework.
Warsh indicated that the working groups would launch 'within the next few weeks,' with most expected to reach conclusions by year-end. Membership will include both internal Federal Reserve economists and external experts.
On communication mechanisms, Warsh expressed skepticism about the value of the SEP and hinted that the frequency of future press conferences could be adjusted—'Press conferences are useful, but when you hold one, you need to ensure you have something important to say.' Morgan Stanley noted that if the Chair himself does not endorse the SEP process, the framework’s sustainability is questionable, though other FOMC participants will continue submitting forecasts until the working groups reach their conclusions.
Regarding the balance sheet, HSBC reported that the policy statement revised the phrasing on reserve management purchases to indicate they would occur 'at the appropriate time,' signaling a more cautious stance toward expanding the SOMA portfolio and leaving room for potential balance sheet runoff in the future.
On the inflation framework, Warsh clearly stated that the Federal Reserve will not reconsider its 2% inflation target itself until it has re-established credibility in achieving that goal.
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