Appointed to Lower Rates, but 'Warsh's Fed' Hints at Hike in First Meeting

At their first monetary policy meeting under the leadership of new Chair Kevin Warsh, U.S. Federal Reserve officials on Wednesday (local time) signaled that the next interest rate adjustment would be a rate hike rather than a cut, contrary to the expectations of President Donald Trump.

The Federal Open Market Committee (FOMC), the Fed's policy-setting body, removed language hinting at further rate cuts—which it had used consistently since starting its rate-cutting cycle in September 2024. In addition, many Fed officials projected in the newly released Summary of Economic Projections (SEP) that the central bank will raise its benchmark interest rate within this year.

As the Fed's projected path for interest rates shifted to a more hawkish stance (favoring monetary tightening) than previously anticipated, the yield on the policy-sensitive 2-year U.S. Treasury note surged to its highest level in 13 months.

Ahead of the FOMC decision on Wednesday, market experts unanimously expected the Fed to hold the benchmark interest rate steady at the current range of 3.50% to 3.75%, reflecting surging oil prices driven by the war in Iran and growing economic uncertainty.

Following the decision to freeze rates, the FOMC's policy statement was notably shorter and more concise compared to previous statements.

In the statement, the FOMC noted, "Inflation remains elevated relative to the Committee's 2 percent goal, in part reflecting supply shocks that have driven price increases in certain sectors, including energy," adding that "the Committee will deliver price stability."

Phrases related to policy signals indicating future directions were completely removed.

In particular, the "easing bias" language hinting at the possibility of further rate cuts was deleted, leaving open the possibility that the next rate adjustment could be a hike.

The change in the statement's wording is interpreted as reflecting new Chair Warsh's stated intention to minimize forward guidance on policy direction.

During his Senate confirmation hearing, Warsh expressed the view that the Fed's forward guidance could lead to policy errors and that the central bank should refrain from using it.

Warsh's assessment is that during the inflation surge in 2021, the Fed was trapped by its previously announced policy path and failed to respond quickly to changing conditions.

Previously, in its policy statement released after holding the benchmark rate steady on April 29, the FOMC had used the phrase "additional adjustments" when referring to its future policy direction.

The continued use of this phrase in the policy statement had been interpreted as meaning that a majority of Fed officials were still considering further rate cuts.

However, during the April meeting, three Fed officials—Beth Hammack (Cleveland), Neel Kashkari (Minneapolis), and Lorie Logan (Dallas)—dissented, arguing that it was inappropriate to maintain the easing bias language of "additional adjustments" hinting at further rate cuts when a rate hike as the next policy move could not be ruled out due to surging energy prices.

The three officials, including Hammack, did not dissent in Wednesday's FOMC decision, and the decision to hold rates steady was passed unanimously.

Meanwhile, unlike the removal of forward guidance from the statement, the interest rate projections by Fed officials in the revised economic outlook report released on Wednesday suggested that the Fed's future rate path has shifted to a more hawkish stance.

In their March dot plot, Fed officials projected one rate cut this year (with a median of 3.4%), but in this revised economic outlook, they shifted their view to project one rate hike this year (with a median of 3.8%).

Of the 18 officials who submitted interest rate projections, nine penciled in at least one rate hike by the end of the year.

Three officials projected a 0.25 percentage point rate hike this year, five expected a 0.50 percentage point hike, and one projected a 0.75 percentage point hike.

Eight officials expected rates to remain unchanged for the rest of the year, while only one projected a rate cut of 0.25 percentage points.

Considering that not a single official projected a rate hike in the March dot plot, the outlook for the Fed's policy path is evaluated to have shifted significantly in a hawkish direction.

During his press conference on Wednesday, Chair Warsh stated that he did not submit an interest rate projection for the dot plot released that day.

The hawkish shift in Fed officials' future policy path is interpreted as reflecting the rapid rise in U.S. consumer prices in May, driven by sustained high oil prices resulting from the war between the U.S. and Iran.

In May, the U.S. Consumer Price Index (CPI) rose 4.2% year-on-year, marking the highest rate in three years and one month.

Although international oil prices have declined following a tentative peace agreement between the U.S. and Iran, experts observe that upward pressure on inflation will persist for the time being.

In May, the U.S. core CPI, which excludes volatile food and energy prices, rose 2.9% year-on-year, significantly exceeding the Fed's 2% target. This indicates that inflation risks in the U.S. remain elevated even when excluding the impact of rising oil prices.

The aftermath of the Trump administration's tariff policies and massive investments in artificial intelligence (AI) infrastructure led by hyperscalers (large-scale data center operators) had been pointed out as potential factors pushing up inflation even before the outbreak of the war in Iran.

The market has also priced in expectations that the Fed will raise interest rates at least once this year.

According to the CME Group's FedWatch Tool, the interest rate futures market priced in an 86% probability that the Fed will raise rates at least once by December, around the time the New York stock market closed on Wednesday.

Just a day earlier, this probability stood at 60%.

Short-term Treasury yields, which are highly sensitive to monetary policy, surged (causing bond prices to plunge).

According to electronic trading platform Tradeweb, the yield on the 2-year U.S. Treasury note stood at 4.21% around the close of the New York stock market on Wednesday, surging by a whopping 0.17 percentage points from the previous session.

This is the highest level in about 13 months, since early May of last year.

(Photo: AP, Yonhap News)
※ Please note: This article was translated by AI and may contain errors.