FED JUNE POLICY – KEVIN WARSH HOLDS BENCHMARK RATES

FED JUNE POLICY – KEVIN WARSH HOLDS BENCHMARK RATES

It was a highly anticipated policy statement as it was the first monetary policy presented by the new Fed Chair, Kevin Warsh. Despite the consumer inflation going up to 4.2%; a good 220 basis points above the Fed target of 2.0%, the FOMC members unanimously decided to hold rates in the range of 3.50%-3.75%. In fact, the US inflation has been above the 2.0% target for 5 years in a row and the only consolation is that core inflation still remains at 2.9%, and this surge in inflation has been largely driven by fuel prices.

The Fed policy expectations were already hinting at a status quo on rates. After all, the Fed did not want to take the risk of hiking rates at a time when growth triggers are still ambiguous. Also, the expectation is that with the end of the US-Iran war and the Straits of Hormuz being opened up again, the price situation should gradually get back to normal. Let us quickly turn to the key highlights of the June policy statement.

WHAT WE READ FROM THE JUNE FED POLICY STATEMENT

Here are some key takeaways from the Fed policy statement released late on June 17, 2026.

The members of the FOMC voted unanimously to keep the benchmark rates in the range of 3.50% to 3.75%. This is despite the consumer inflation scaling up to 4.2% for the month of May 2026.

The reason the Fed did not act on the surge in inflation is the subdued levels of core inflation and the expectation that inflation should moderate once the Straits of Hormuz are opened up and normal trade routes resume.

In a significant move, the Fed statement was made substantially shorter and any reference or any linguistic hint towards a bias for cutting rates were removed. This is clearly a sign that any move in rates from hereon would only be on the upside.

The most interesting shift was in the dot plot charts with the members of the FOMC removing any indications of a possible rate cut during the year. Warsh had his own reservations about giving guidance on inflation, rates, GDP, and unemployment.

The median estimate for rates has gone up from 3.4% to 3.8%, clearly indicating that there is room for a 25-50 bps hike in rates before the end of this year. The Fed chair did not offer his own projections on macro parameters.

The statement was brief (130 words versus the normal 340 words) and just committed the central bank to controlling inflation. However, that does raise a question as to “If 220 bps above target is not abnormal inflation, then what is?”

The statement specifically noted that the Fed would not look to cut the balance sheet size of the Fed from the current $6.7 billion. This is an indicator that the Fed will work towards maintaining sufficient liquidity in the money markets.

While the Fed has not given any affirmative view on rates, it has almost ruled out rate cuts and underlined the possibility of 25-50 bps rate hike in the current calendar year.

WHAT DOES THE CME FEDWATCH TELL US?

The CME Fedwatch calculates the probability of rate hikes based on the trading in Fed Fund futures. Here are the probabilities across milestone meetings over next 2 years.

Data source: CME Fedwatch

Clearly rate cuts are almost ruled out till the middle of 2027, unless the macros change substantially. Even in July 2026, there is just a 34.2% probability of a rate hike, but a 25-bps rate hike looks lot more likely in September 2026 with a probability of above 71%. However, through 2026 and 2027, the maximum rate hike that is anticipated is only 50 basis points up to the range of 4.00%-4.25%. We may be entering an interesting phase where the global central banks may start to take a more hawkish view of interest rates.