Market Views from the Global Fixed Income, Currency & Commodities (GFICC) group
The Federal Open Market Committee (FOMC) voted to keep the federal funds rate target range steady at 3.50%–3.75%. There were no dissents.
Changes to the FOMC Statement:
- The statement was re-written under new leadership. As Chair Warsh himself described in the press conference: “You might have already noticed something -- a difference in today's policy statement. It's a bit shorter, a bit simpler, and it dispenses with some older language. That statement just gives you the facts as best we can judge it. Absent also is so-called forward guidance, which we agreed was not well-suited to the current policy conjuncture”
- The new statement does not name the voters but states it was a 12-0 vote. The statement also no longer includes a balance of risks and ends with a statement that “the Committee will deliver price stability.” It is notably missing a comment on full employment.
- On the economy, activity is still described as expanding at a “solid pace”, job gains “kept pace with the workforce” and the unemployment was little changed. They added a description of productivity. Inflation remains above the Fed’s goal caused by “supply shocks that have driven price increases in certain sectors, including energy”.
- The statement re-affirms the current balance sheet policy to “maintain ample reserves in the banking system”.
Summary of Economic Projections:
- Investors received FOMC participants’ outlooks for employment, growth, and inflation. Relative to March, their inflation forecasts increased notably. The median of the Committee continues to expect a convergence towards an equilibrium of around 2% growth, 4% unemployment, 2% inflation, and a 3% Fed Funds Rate over the next few years.
- The Core Personal Consumption Expenditures (PCE) inflation forecast increased to 3.3% in 2026 and 2.5% in 2027 and 2.1% in 2028. The number of participants who saw upside risks to their core inflation forecast increased from 16 to 17 out of 19 members.
- The Committee’s growth forecast was nudged down to 2.2% in 2026, unchanged at 2.3% in 2027 and 2.2% in 2028. The longer run growth forecast was unchanged at 2%. The number of participants who saw downside risks to growth fell markedly from 14 to 5 out of 19 members.
- The unemployment rate forecast was nudged down to 4.3% in 2026 and unchanged in 2027 at 4.3% and 4.2% in 2028. The longer-term unemployment rate was also unchanged at 4.2%. The number of participants who saw upside risks to their unemployment rate forecast fell from 16 to 7 out of the 19 members.
- The median expectation for the path of the Fed Funds rate shifted to reflect 12.5 basis points (bps) of hikes in 2026 followed by rate cuts in 2027 and 2028.
- The median member now expects the Fed funds rate to end 2026 at 3.75%. 9 participants expect 1 or more rate hikes while 8 expect no change and 1 expect a rate cut. In the press conference, Chair Warsh confirmed that he did not submit a forecast but stated, “I have encouraged my colleagues to do so. I, however, refrained from offering any projections of my own, consistent with my long-held views on the SEP, at least as currently structured”.
- The median participant shows a rate cut back to 3.625% in 2027 and back to 3.375% in 2028. The most hawkish participant sees the policy rate at 4.375% in 2026 and 2027 and 3.875% in 2028. The most dovish participant sees the policy rate at 3.375% in 2026, 2.875% in 2027 and in 2028.
- The long run dot remains at 3.1% but drifted down on an unrounded basis.
Key Quotes from Chair’s Press Conference:
- “We recognize that inflation has been running well ahead of the Fed’s long-stated inflation goal of 2%. That's been going on for more than five years. Persistently high prices are a burden for the American people. But the recent past need not be prologue. I am pleased to report that members of the FOMC are unambiguous and unanimous. This committee will deliver price stability.”
- “If I look at the housing markets as one example, Fed policy isn't the single determinant of the state of the housing market. But broadly, I would say there, Fed policy appears to be somewhat restrictive. I would have a hard time managing to say those words if I were to see what's happening in financial markets. I'd say it's uneven. That's perhaps a function of different transmission mechanisms of monetary policy, whether monetary policy is coming from our interest rate tool or our balance sheet tool. But the good news is we have a task force on that, the balance sheet task force will look more at that subject.”
- “There was one proposal on the table [to cut rates]. There was no discussion of any other proposals. The discussion on that proposal I would say was quite limited. The group was unanimous and unambiguous on it. It has been the practice of this central bank and others to have a range of alternatives. Today we had one. I thought it furthered discussion, deepened it, and made it clear what we needed to do and how we needed to deliver. I wouldn't prejudge what happens in the future. There was only one big subject for us…We had a good family fight on it for a couple of days. We ended up in a better place.”
- “I don't believe that we have a cruel choice. I don't share the view that was expressed a few generations ago that Federal Reserve chairmen show up at a podium and say you've got to choose…What I believe is if we do our job, we can make strong growth, low prices, and strong employment mutually compatible.”
- “Committee thought the labor markets were stable. There were some people around the Committee who thought that it was trending better than that. Trends matter more than data points. And I'd say the jobs data has been moving in a good direction. If I heard one other thing around that subject over the course of the last couple of days, what I heard was that strong productivity-led growth is not something that we fear, but something we embrace.”
- “With respect to AI and the growth of datacenters and infrastructure around it, we're counting the demand side. And it is no doubt showing up in GDP figures. We can be less certain when we infer the timing and extent of the growth on the supply side. It may be an intuition the supply side is going to expand but it'll take longer. I just describe it this way. There's a race between supply and demand. Milton says the only thing we know about economics is there's a supply line, and a demand line, and they ultimately cross.”
- “I'm appointing a task force in each of five areas that are central to the broad conduct of monetary policy -- first, Fed communications. Second, the Fed's balance sheet. Third, our use and reliance on existing data sources. Fourth, productivity and jobs in an era of transformation. And last, the Fed's inflation frameworks. My expectation is the task forces will begin work in the next couple of weeks. And we'll start to get some more information from them, some more framing of how they see things starting in the fall, hopefully most if not all concluding by year-end.”
- “On the 2% inflation objective, that is the Federal Reserve's long-held objective of 2%. You've heard me say before I tend to focus on the left of the decimal point. The 2 is the left of the decimal point. 0 is to the right. I see no reason, until we have reestablished our commitment and ability to deliver on the 2% inflation objective, to revisit that. So that'll be outside the scope.”
- “I think financial markets perform best when they react to incoming data. I think the financial markets work less efficiently when they ask a question, how will the Federal Reserve react to that incoming information. The more that markets are paying attention to what's happening in the real economy, deciding what's good data and what's less good data, the more financial markets can price what they believe is the most likely and what are the tail risks. Financial market prices are probably the most important source of information to guide central bankers. …I'm not going to offer any commentary on market reaction over the last 30 or 60 minutes. What we've given markets is a new chapter for the central bank, some fresh thinking.”
Our View:
- The Fed held the policy rate steady as expected. Since the June meeting, the war with Iran has persisted but energy prices have not accelerated as feared. At the same time, hiring data has picked up and firings remain low. Growth remains sub-trend after smoothing through the noise. The Fed’s preferred measure of inflation, personal consumption expenditures (PCE), is running notably hotter than the Consumer Price Index (CPI) and other trimmed mean inflation measures that reflect continued progress towards cyclical disinflation. The split in the Fed’s 2026 rate projections - with 9 in favor of hikes while 9 are in favor of a hold or cut - made it clear that members of the committee are becoming increasingly uncomfortable with the elevated level of inflation.
- We maintain our base case of sub-trend growth. Real gross domestic product averaged 2% in 2025. Growth in the first quarter rose 1.6% annualized aided partially by the re-opening of the government after the prolonged shutdown. Second quarter growth is tracking well around 2-2.5%. Business investment in sectors such as technology and artificial intelligence (AI) remains robust but a broader capital expenditure (capex) boom outside of tech remains limited. The consumer has remained resilient, buoyed by tax refunds and the wealth effect, but faces headwinds from slowing real income growth.
- We adjust the fair value range for the 10-year U.S. Treasury higher to 4.00% – 4.50% to reflect the shifting balance of risks to the labor market, inflation and the Fed’s reaction function. Recent labor market data suggests a labor market that remains in balance but with less downside risks. Inflation is expected to spend more time above target although the impact of higher energy prices appears relatively contained to gasoline and airfares. Limiting yields from falling meaningfully below the bottom end of the range is the lack of a sharp deterioration in labor markets or pickup in layoffs. Limiting yields from rising meaningfully above the higher end of the range is the stability of long-term inflation expectations.