The Federal Reserve held interest rates steady on Wednesday, while updated projections showed nine officials now anticipate a rate increase by end-2026, removing prior language flagging the likelihood of further borrowing cost reductions this year.
The policy rate remains in the 3.50%-3.75% range, where it has sat since last December. Officials marked the inflation outlook for end-2026 sharply higher to 3.6% from 2.7%, though they see it falling to 2.3% the following year without a rate increase, consistent with the Fed's view that elevated prices stem from supply disruptions expected to resolve over time.
"Economic activity is expanding at a solid pace despite elevated uncertainty that owes, in part, to the conflict in the Middle East," the Fed said. "Productivity growth and capital investment are strong. Job gains have kept pace with the workforce, and the unemployment rate has changed little."
The statement, a shortened document returning to a format similar to that used under former Fed Chairman Alan Greenspan, was approved by a unanimous 12-0 vote by the Federal Open Market Committee. Economic growth was marked down slightly, with unemployment expected to end the year at 4.4%, unchanged from March forecasts.
Only 18 of 19 policymakers submitted dot-plot projections, with the missing submission widely presumed to belong to Fed Chair Kevin Warsh, roughly three weeks into the role and a known critic of the quarterly Summary of Economic Projections.
Markets sold off on the news. The Nasdaq Composite and S&P 500 both slid more than 1%, while the Dow gave up nearly 1%, or around 500 points.
Some market watchers saw the meeting as the opening move in a broader institutional reset. Chris Zaccarelli, Chief Investment Officer at Northlight Asset Management, said Warsh appeared to be laying groundwork for significant structural changes.
"Like a skilled CEO brought in from the outside to turn a company around, the new Fed Chair reiterated his confidence in the existing leadership and practices, but organized committees and working groups to 'study' how things are currently done, setting the stage for far-reaching changes in the future," Zaccarelli said.
He added that Warsh's approach could eventually encompass a meaningful reduction in the Fed's balance sheet alongside gradual rate cuts, a combination that may appear contradictory on its surface but could serve to cool financial markets while keeping short-term borrowing costs from rising sharply.
