In his inaugural policy meeting as Federal Reserve Chair, Christopher Warsh has placed a sword of Damocles over the market: interest rate hikes are always a possibility.

By withholding forward guidance, declining to submit his own dot plot, and slashing the FOMC statement's word count to less than a third of its previous length, the new leader—described as "decisive and terse"—signaled a firm, consistent, and clear commitment to achieving the 2% inflation target. He stated that the Fed, having missed its inflation goal for five years, is now taking steps to correct course.

In response, traders have fully priced in a Fed rate hike by October 2026, with a 100% probability of a hike this year. They also anticipate two rate increases before the end of the first quarter of next year.

Heightened Rate Hike Bias

The FOMC voted unanimously to maintain the benchmark overnight lending rate in the 3.5%–3.75% range. However, the "dot plot," which reflects officials' interest rate expectations, shows that Fed officials have eliminated earlier expectations for rate cuts this year and instead signaled the possibility of hikes.

Out of 19 officials, only 18 submitted dot plot forecasts. Market speculation prior to the meeting suggested Warsh would not submit a personal rate expectation dot, which he confirmed during his press conference. Warsh has previously expressed aversion to this type of forward guidance, believing it constrains future policy actions.

Among the 18 officials, nine believe rates should be raised in the remaining months of this year, eight believe rates should remain unchanged, and only one anticipates a single rate cut. The median dot plot projection points to a 25-basis-point rate increase.

The latest FOMC statement not only removed language previously hinting at an easing bias but was also significantly condensed. This policy statement contained a mere 130 words, compared to 341 words in the April 29 statement from the previous meeting. The text simply summarized the current economic situation and included a paragraph reaffirming the commitment to curbing inflation.

The statement noted that U.S. economic activity continues to expand at a solid pace, with strong productivity growth and capital investment. Job gains remain aligned with labor supply, and the unemployment rate has held steady. Inflation remains significantly above the Committee's 2% objective, partly due to supply shocks in sectors like energy, which have driven up related goods prices. The Committee reiterated its commitment to price stability and to maintaining ample reserve levels in the banking system, despite uncertainties stemming from the Middle East conflict.

During his first press conference as Chair, Warsh acknowledged the significant changes to the policy statement. "It's shorter, uses plainer language, and removes some dated language. This statement simply presents the core facts we have determined based on our assessment," he said. He added, "The statement no longer contains so-called forward guidance. The Committee has agreed that such guidance is not well-suited to the current policy environment."

Ming Ming, Chief Economist at CITIC Securities, stated that Warsh's overall refusal to provide forward guidance did not signal a dovish stance, and some of his remarks carried a hawkish tone. Combined with the explicitly more hawkish dot plot, this has fueled market expectations for rate hikes. Ming believes that, considering current U.S. inflationary pressures and the progress of U.S.-Iran negotiations, the probability of the Fed maintaining its current policy rate this year remains high.

Li Gang, Research Director at the China Foreign Exchange Investment Research Institute, similarly views the latest stance as a clear hawkish signal and a core policy direction set by Warsh upon taking office. He suggests that Warsh's current emphasis on combating inflation is primarily a move to rebuild policy credibility as a new leader. "On one hand, the U.S. market has gradually adapted to relatively high inflation levels; on the other, the Fed's policy framework is a multi-faceted balancing act that must consider multiple objectives beyond inflation, including unemployment, financial market stability, sectoral regulation, and overall market expectations," Li said.

Intensifying Inflationary Pressures

In the latest Summary of Economic Projections (SEP), the Fed lowered its 2024 GDP growth forecast by 0.2 percentage points to 2.2%, maintained its 2027 growth forecast at 2.3%, and raised its 2028 forecast by 0.1 percentage points to 2.2%.

Regarding inflation, price pressures have intensified sharply. The Fed now expects core PCE inflation of 3.3% this year, a 0.9 percentage point upward revision from the March forecast. The forecast for 2027 was raised by 0.3 percentage points to 2.5%. Adjustments to overall PCE were similar, with this year's forecast raised by 0.9 percentage points to 3.6% and the 2027 forecast raised by 0.1 percentage points to 2.3%. This indicates that the current high inflation is driven by supply-side disruptions, and price increases from such shocks are often transitory.

Warsh reiterated the Fed's firm commitment to returning inflation to its 2% target. He noted that the Fed cannot significantly influence specific prices (such as those affected by supply shocks like energy); its core task is to ensure that "second-round price effects" do not materialize. "The Fed's determination to achieve the 2% inflation target is very firm, with unanimous agreement among all members and an unambiguous stance. Over the past five years, we have failed to clearly communicate this core position, which is a key shortcoming. We will make changes going forward," he stated.

The labor market has remained relatively resilient. The Fed expects the unemployment rate to be 4.3% this year, a 0.1 percentage point downward revision from the previous forecast. The forecast for 2027 remains at 4.3%, with the long-term unemployment rate steady at 4.2%. Warsh mentioned that central bank officials generally view the U.S. labor market as stable, with some even considering its performance better than stable. He added that trends are more important than specific data points. "The overall trend over the past 3 to 6 months is more important than any single data point or any single data release. I believe the employment data has been moving in a positive direction."

Wang Jinbin, a professor at the School of Economics at Renmin University of China, analyzed that the Fed's forecast for future U.S. inflation trends is based on its assessment of the primary factors driving inflation. Among these, rising energy prices have contributed to 40% of the increase in the U.S. CPI, making it the most significant driver. This is followed by housing costs, which account for roughly one-third of the CPI weight, and food prices. Whether energy prices will decline significantly in the future depends on developments in the Middle East situation. The Fed also faces uncertainty regarding the prospects for inflation decline and is not optimistic about the speed of future disinflation.

Initiating Federal Reserve Institutional Reform

Former President Donald Trump repeatedly called on the Fed to cut rates, making the Fed's ability to maintain independence under Warsh's leadership a key market focus. Warsh also announced the establishment of five working groups to systematically evaluate the Fed's communication mechanisms, balance sheet, data source usage, productivity and employment, and inflation framework. He emphasized the intention to bring in top talent from the economics field to re-examine current practices and propose next steps for policymakers to consider.

Warsh previously mentioned that "by the end of the year, we expect to conduct a comprehensive review of all communication methods, including press conferences, statements, meeting minutes, etc." Regarding this, Ming Ming analyzed that this implies the format of the dot plot or whether it will continue to be released may change by the end of this year or next year.

From a long-term reform perspective, Li Gang believes the phasing out of the dot plot is an inevitable trend. The core direction of Warsh's current reform is to weaken rigid forward policy guidance, abandon fixed numerical expectation constraints, and replace the signaling role of the traditional dot plot with a more regular and flexible communication mechanism. As markets gradually adapt to the Fed's new communication mode, the policy guidance value of the dot plot will diminish, and it may naturally exit the Fed's policy framework.

Regarding market implications, Li Gang emphasized that the biggest risk for U.S. stocks currently is the extreme divergence in sectoral performance, with market capital highly concentrated in the AI sector, lackluster performance in most other sectors, and an accumulation of overall bubble risks, warranting vigilance for a potential market adjustment in 2027. If the Fed maintains high interest rates and market liquidity continues to tighten, U.S. stocks could face a phased correction.