The Federal Reserve, under the leadership of Kevin Warsh, kept interest rates unchanged in its first meeting, but the dot plot reveals that most committee members expect a quarter-point hike before the year ends.
The Federal Reserve of the United States has passed its first test with Kevin Warsh at the helm. The new president of the US central bank, who replaced Jerome Powell, has decided to keep interest rates unchanged in his first meeting, a decision that was unanimous among the 12 committee members. However, the market is already pricing in a 70% probability of a quarter-point hike before December, according to futures.
The Dot Plot Reveals Internal Divisions
Warsh has cancelled the forward guidance tool: the Fed will no longer anticipate its next steps in monetary policy. But he has retained the controversial 'dot plot', where the 18 senior officials of the central bank (excluding Warsh himself) outline their forecasts for growth, employment, and inflation, as well as their rate recommendations for the period 2026-2028. From this document, a consensus emerges to raise rates by a quarter point at the latest by December.
However, divisions are evident. Half of the members want to raise rates; the other half prefer to keep them where they are. Of the 18 voices, only eleven will vote in the upcoming meeting at the end of the month, along with Warsh. The public is unaware of the stance held by those who actually decide. Donald Trump himself, who appointed Warsh, has acknowledged the tension:
"(Warsh) has a board that may be a bit hostile and, unfortunately, it may be a board that wants to do the wrong thing. He is a great person and a great professional, and I know where he would like to be, but he has to do what he has to do."
The Economy Cools, but Inflation Remains a Priority
Since the last meeting, the US economy has shown signs of slowing down. The real-time forecast from the Atlanta Fed has dropped from GDP growth above 4% in May to 1.2% last week. Although final sales to the domestic private sector remain at 3.1%, consumer spending has decreased by half a point, reducing the risk of overheating. The employment report for June, released on Friday, reinforced this view: the US created 57,000 net jobs, half of what was expected, and 74,000 jobs from previous months were revised downwards.
Despite all this, inflation remains the priority. Warsh has been clear: inflation is very high and the central bank will address restoring price stability, meaning reducing it to 2%. The market trusts the Fed: bonds have not suffered turbulence during the transition and futures are pricing in a rate hike before the midterm elections in November. For investors, the question is not whether rates will rise, but when. The next meeting of the Federal Open Market Committee (FOMC) will be key to clearing up the uncertainty. In the meantime, Warsh plays it close to the vest: he communicates little, but his actions speak for themselves.
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