The Federal Reserve held interest rates steady at its first policy meeting under new Chair Kevin Warsh, but a majority of officials now see at least one rate increase before the end of the year — a sharp reversal from the cuts they projected just three months ago.
In a brief statement that reflected Warsh’s preference for less commentary, the central bank removed language that had previously signaled its next move would be a cut. Nine of the 19 Fed officials who submitted projections now expect at least one hike in 2025, with six of them penciling in two or more increases — a dramatic swing from March, when no official forecast a hike and the committee as a whole saw one cut in 2026.
Consumer prices are running at a three-year peak of 4.2%.
Related: EU Commission proposes trade restrictions against Israeli settlements
The rise is lifted largely by higher energy costs since the Iran war began on February 28. Even if a peace agreement announced by Trump holds, it could take months for gas and other prices to stabilize. Some expenses — such as clothes, dental care and child care were rising before the conflict.
Warsh takes a different approach
Wednesday’s meeting was the first for Warsh. He was appointed by Trump after the president sharply criticized predecessor Jerome Powell for not cutting rates deeply enough. Those attacks largely backfired, prompting Powell to stay on the Fed’s board, where he voted Wednesday to keep the benchmark rate at about 3.6%.
Warsh did not submit his own rate projection. He told reporters he encouraged colleagues to do so, but had previously criticized the projections for potentially locking it into a fixed outlook. He also struck forward guidance from the policy statement entirely.
“I think financial markets perform best when they react to incoming data,” Warsh said at a press conference. “They work less effectively when they ask, ‘How will the Federal Reserve react to that information?’”
Related: Europe’s longest and shortest working weeks revealed
He also announced five task forces to review how the central bank communicates, the sources of data it uses, and the frameworks for evaluating price growth — part of his goal to make it “clear-eyed and focused on the future.”
The S&P 500 fell 1.4% on the day.
Inflation and hiring complicate the picture
Warsh faces a difficult balancing act. Raising rates could slow borrowing and spending to cool price growth, but it would risk drawing White House criticism and could lift mortgage and auto loan costs just before the midterm elections. On the other hand, he consistently argued for lower rates last year while campaigning for the job, pointing to AI as a technology that could eventually reduce it by expanding the economy’s productive capacity. Many economists were skeptical then; they note that heavy investment in semiconductors and computing equipment is currently adding to price pressures.
Hiring has also picked up, removing a key rationale for cutting. In May, employers added 172,000 jobs, the third straight month of solid gains. In January, it had forecast two rate cuts this year partly because of worries that employers were shedding jobs. The worry has faded.
Related: Top Vitamins To Tackle This Winter
“This situation is entirely of the US’s own making,” said Stuart Clark, portfolio manager at Quilter. “With energy prices likely to remain raised relative to the start of the year, inflation isn’t going to suddenly begin to fall.” He added that given the employment data and consumer spending numbers, “it is not out of the area of possibility that the Fed will have raised rates by the end of this year.”
Eight policymakers still favor keeping rates unchanged in 2025; only one forecast a cut. Warsh repeatedly stressed its commitment to price stability. “We’ve missed on it for five years, and we’re gonna fix that,” he said.
The next policy meeting is set for July, and markets will be watching closely for any sign that the hawkish faction is gaining ground.