Menu
4 min read
The Fed held rates steady at 3.5-3.75% as expected. But changes to forecasts vs. the Mar- 2026 meeting pushed 2Y yields up and stocks down: inflation outlook up, growth down, median Fed dot-plot 40-50bps higher for CY26-27. Markets now expect Dec-2026 rate at 4% (minimum one hike). With growth resilient and labor markets holding up too, the case for near-term rate cuts is weak. Also as expected, the new Fed chair launched five task forces to review communications, balance sheet, data, productivity/jobs, and the Fed’s inflation framework. Results expected end-CY26. The changes are likely to face constraints too: though the hawkish inflation stance can help 10Y yields, balance sheet reduction can put upward pressure on them, possibly inviting political pressure.
No change to rates, but forecasts raised; commitment to inflation reaffirmed
As expected, the FOMC held policy rates at 3.5-3.75%. The language in the statement and press conference remained hawkish, reaffirming the Fed’s commitment to bring inflation (currently elevated and rising) to the Fed’s 2% target. The trimmed statement was unanimously approved, but the dot plot (ex-Warsh) continues to show divergent views, with a clear uptick in rate expectations of FOMC members. The median estimate of policy has moved up by 40/50/30bps for 2026/27/28 vs. the Mar-26 projections. Market now prices Dec-26 Fed policy rate at above 4%, above the FOMC median. With short-end rates up, the yield curve flattening that began in Feb-26 continues.
A worse economic backdrop per new FOMC projections; no case for rate cuts
While Gov. Warsh refrained from issuing specific forward guidance, and dismissed the dot plots/forecasts as vulnerable to change, it was clear Fed members’ outlook turned grimmer vs. Mar-2026. Inflation forecasts were raised (core PCE now likely to stay above the 2% target through 2028), and CY26 growth cut by 20 bps. A resilient labour market, robust retail sales, and rising inflation support the case for rates to remain elevated. Per the Fed’s own measure too, the financial conditions are currently supportive of growth which weakens the case for any rate cuts in the near term.
Five task forces for an institutional rejig; incremental moves amid constraints
The new Fed chair has begun his institutional rejig in line with his stated preferences in the run up to his appointment. Five task forces (which enlist help from outside the Fed) are being set up to review: (i) communication, (ii) balance sheet, (iii) data sources, (iv) productivity & jobs, and (v) the inflation framework. Today’s meeting started with delivering on his promise of communicating less. Many of the intended changes though will take time (year-end timeline as per press conference remarks) and run into constraints. For instance, shrinking the balance sheet will push long-term yields higher, possibly triggering political opposition. We expect large changes to be incremental and well-choreographed.
To read the full report Click Here
