Fed holds rates steady as new Chair Kevin Warsh commits to price stability

The Federal Reserve held its target federal funds interest rate in the 3.50%-3.75% range at its June meeting, a decision investors broadly expected. Elevated inflation primarily stemming from higher energy prices has increased investor expectations for higher policy rates later this year, in contrast to the gradually decelerating inflation prior to the conflict in Iran paired with previous expectations for rate cuts this year.

Why the Fed held rates steady

The policy decision was not the primary market focus. Investors centered on the first meeting led by new Chair Kevin Warsh, the Fed’s shorter statement, the removal of prior forward guidance and the updated Summary of Economic Projections (SEP). Warsh made three key announcements during the highly anticipated press conference:

1. Warsh used his first press conference as chair to reinforce the Fed’s commitment to price stability. In his opening statement, he said the committee is “unanimous and unambiguous” in its commitment to fighting inflation, mentioning “price stability” 12 times during the press conference. Bond yields increased during the press conference, which suggests investors interpreted this statement as signaling that Warsh may support rate hikes if inflation remains persistent.
2. Warsh signaled a broader review of Fed practices. He announced five task forces focused on Fed communications, balance sheet policy, data sources, productivity and jobs in an era of transformation, and the Fed’s inflation framework. The emphasis on these topics highlights the reputation of Warsh as a reformer and aligns with his previous track record of highlighting opportunities for the Fed to rethink how it deploys monetary policy.
3. Warsh restated his view that forward guidance from the Fed may be inappropriate, aligning with his long-running preference for reassessing how the Fed communicates and implements policy. Investors have relied heavily on forward guidance and quarterly projections to anticipate rate decisions. As a testament to his initial influence, the official statement was much shorter than recent statements and focused on current conditions rather than the potential forward path of the economy or policy. Warsh also refrained from submitting an expectation about future policy rates reflected in what is referred to as the “dot plot.”

While Warsh refrained from submitting projections, the Fed’s June Summary of Economic Projections (SEP) showed median expectations for one to two rate hikes this year, in line with current market expectations and an increase from the March SEP. Inflation expectations also rose for 2026 and 2027; elevated energy prices and ongoing supply uncertainty persist due to the conflict in the Middle East.

Earlier tightening helped mitigate inflation over the past four years, but higher oil costs are elevating near-term prices. The Core Personal Consumption Expenditures (PCE) Price Index rose from 3.0% in December 2025 to 3.3% in April 2026. West Texas Intermediate front-month futures prices rose from near $57 per barrel at the beginning of the year to a peak of $113 in April before recently falling to $76. Higher energy prices have stoked many inflation readings and complicated the Fed’s outlook as it balances its mandates of maximum employment and price stability.

Federal Reserve balance sheet and market liquidity

On the balance sheet, the Fed stopped shrinking its bond holdings in December. Those holdings stand near $6.6 trillion today after peaking near $9 trillion in 2022. The Fed began buying short-term Treasury bills in December 2025 to ensure ample banking system reserves and to keep short-term interest rates near the intended policy rate. The Fed recently announced it would reduce regular purchases. Expanding the balance sheet by purchasing Treasury bills results in improved market liquidity by absorbing a portion of incremental supply. Liquidity, the money readily available to purchase goods, services and financial assets, can also cushion markets against unforeseen financial market shocks, and liquidity measures remain constructive. Warsh has expressed reservations about its long-run efficacy and questioned its appropriateness as policy tool.

Treasury yields rose today, with investors interpreting Warsh’s comments as increasing the odds of rate hikes this year. Two-year Treasury yields rose 0.16% and 10-year Treasury yields rose 0.06%. Large stocks, represented by the S&P 500, fell 1.2%, while small stocks, which can be more sensitive to interest rates, fell 0.8%, represented by the Russell 2000.

Globally, central banks eased policy in 2025, but many have increased rates in response to recent energy price increases. The European Central Bank and Bank of Japan each increased rates earlier this month, with the Bank of England and Bank of Canada expected to increase rates at some point this year.

Maintaining a constructive outlook amid market uncertainty

We maintain a constructive outlook for diversified portfolios and see opportunities in growth-oriented allocations including U.S. stocks, global infrastructure and structured credit. While higher energy costs risk increasing inflation and dampening economic activity, consumer spending and corporate earnings growth remain resilient with fiscal support in the form of lower corporate and individual taxes and recent tariff rebates. Diversified portfolios spanning a variety of allocations can help limit the impact of price swings on individual assets.

We will keep you informed as new data arrives and as we update our assessment of market conditions. As always, we value your trust and are here to help in any way we can. Please do not hesitate to let us know if we can help address your unique financial situation or be of assistance.

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