Research US: Fed Review: As Committed as Ever

• The Fed maintained its monetary policy unchanged in Kevin Warsh’s inaugural meeting as the new Chair. Warsh did not submit personal projections, but the distribution of other committee views signals a shift to hiking bias.
• The meeting marked a clear step away from traditional forward guidance, but Warsh emphasized a firm focus on bringing inflation back to target. Future of communications and balance sheet policy will be evaluated by separate ‘task forces’ by year-end.
• EUR/USD broke below 1.15, UST yields rose and the curve flattened, as terminal rate pricing shifted 17bp higher. Markets also priced in a more front-loaded risk for a hike, with 8bp priced in by July and 20bp by Sep. We maintain our call for hikes in Dec and March, but see risks skewed towards an earlier start.
• Our recommendations to go long USD vs. SEK and NOK, as well as to pay 2y SOFR-ESTR spread performed well and we continue to like all three cases.

Kevin Warsh set the tone for a new era of forward guidance (or lack thereof) as the Fed published an aggressively shortened statement with focus on only three main messages: policy remained unchanged today, the Fed remains committed to maintaining ample reserves and the committee will deliver price stability.

The final point was in focus during the press conference, as Warsh firmly refrained from speculating about the future, and instead underscored that the Fed’s commitment to bringing inflation down to 2%.

Warsh did not submit his personal ‘dots’ but encouraged the rest of the committee to continue doing so. The updated rate projections signalled an even clearer shift towards a hiking bias than we envisaged in our Fed preview, 16 June. Only one participant called for a rate cut this year, 8 called for unchanged rates and 9 called for 1-3 hikes. Median dots for 2027 and 2028 were lifted by 50bp and 25bp respectively. GDP and unemployment rate forecasts remained little changed, but inflation forecasts were revised higher (core PCE 3.3% in 2026, from 2.7%) – in line with our expectations. The committee saw risks surrounding the GDP and labour market outlooks as balanced (prev. skewed towards weaker conditions), 17/18 participants saw core inflation risks skewed to the topside, also in line with our expectations.

Warsh did not specify whether FOMC will continue submitting ‘dot plots’ going forward. Instead, he announced five ‘task forces’, which will evaluate the central banks’ communications, balance sheet policies, data sources, productivity and the inflation framework going forward. Timeline for changes is by year-end.

We maintain our forecast for two Fed hikes over the next year, in December and March. We see risks skewed towards an earlier start to the hikes, potentially in September, if macro data continues to come out stronger than expected. We expect the Fed to continue expanding its balance sheet with reserve management purchases of T-bills at a monthly pace of roughly USD10bn in the foreseeable future.

Market Reaction

UST yields shifted higher and the curve flattened, as markets’ terminal rate pricing rose by 17bp. Markets now price in nearly two full hikes for the coming year. The hike expectations were also front-loaded noticeably, as markets now price in 8bp already for July and cumulative 20bp by September. Our recommendation to pay 2y SOFR-ESTR spread is 18bp in the money. We continue to like the case structurally, but think the tactical potential is starting to look exhausted from risk-reward perspective.

In the long-end of the curve, expectation of tighter policy stance drove breakeven inflation expectations lower. Tighter financial conditions are set to weigh on growth, which helps explain the decline in equities and underperformance of cyclical FX. EUR/USD broke below 1.15, and we maintain our below-consensus 12M forecast at 1.12. Our trade recommendations to go long USD vs. both SEK and NOK performed well, and we still like both cases looking ahead. We have introduced a trailing stop-profit for the long USD/NOK trade to protect profit.