• FOMC minutes showed officials were split on the policy path, with some seeing room for cuts while others warned inflation risks could require hikes.
  • The report also highlighted Warsh’s shift toward shorter statements and less forward guidance, signaling a quieter and less predictable Fed.

The Federal Reserve kept interest rates unchanged at its June meeting, the first under new Chairman Kevin Warsh.

Minutes released this week show a committee still divided on what comes next. Some officials see room to cut rates later this year, while others believe hikes may be needed. For now, the Fed is watching and waiting.

A Split Committee, Working Through Scenarios

The minutes revealed a Fed undecided on its next move. Fed policymakers formed two scenarios. In the first one, inflation gradually returns to its 2% target and interest rates become stable, or move lower. ⁽¹⁾

In the second scenario, AI-driven demand, tariffs and supply disruptions related to developments in the Middle East keep inflation elevated, requiring rate hikes to bring it down again. ⁽²⁾

While many officials still saw rates ending the year at or slightly below the current range, a narrow shift in the dot plot pointed to one possible hike before cuts resume in 2027 and 2028.

Despite this, all voting members backed holding rates steady between 3.50%-3.75%.

Markets Moved on Middle East Developments

This spring, market moves were driven less by the Fed and more by developments in the Middle East, especially the US-Iran memorandum of understanding, which had a major impact on oil.

The S&P 500 gained nearly 6%, led by tech. Higher earnings expectations drove much of that move, especially among AI-linked names. IPO activity is set to pick up too, with proceeds expected to help fund AI infrastructure spending.

Treasury yields also climbed. The 10-year note rose about 20 basis points since the April meeting and roughly 50 basis points since the Middle East conflict began. The Fed also stated that Treasury buyers have changed, with fewer held by central banks and other official investors who are usually less sensitive to price. ⁽³⁾

Inflation Still Running Hot

Inflation, as always, remains the Fed’s main concern. The core PCE index came in at 3.4% in May, remaining well above the Fed’s 2% target. Officials pointed to several factors, like lingering tariff effects, higher energy prices, and surging demand tied to AI infrastructure. ⁽⁴⁾

Prices for transportation, airfares, and agricultural inputs have all risen.

The good news is that longer-term inflation expectations remain anchored near 2%, but the bad news is that officials fear that years of above-target inflation could start shifting those expectations if price pressures don’t ease soon. ⁽⁵⁾

The Global Picture Is Mixed

Growth abroad slowed in the first quarter, with weakness in Canada, the euro area, and Mexico. High-income Asian economies were the exception, supported by surging high-tech exports tied to the AI buildout. ⁽⁶⁾

The Middle East conflict is weighing on foreign growth through higher energy costs and weaker confidence, particularly in lower-income Asia and Europe.

Foreign inflation has jumped as a result, pushing some central banks, including the ECB, to raise rates. Most foreign central banks are now leaning toward a much slower easing pace or outright hikes to guard against second-round inflation effects. ⁽⁷⁾

A Leaner, Quieter Fed Statement

Beyond the rate decision, the meeting marked a shift in how the Fed communicates.

Warsh has pushed to cut back on forward guidance, and the committee agreed. The post-meeting statement dropped the language, suggesting a bias toward future rate cuts and was roughly a third the length of typical statements.

Warsh also announced five new task forces to review the Fed’s operations, including how it communicates policy. The move reflects his broader push to make the Fed less predictable and less committal about future rate paths.

The Economy Holds Up, For Now

Moving aside from the inflation debate, the economic picture looks solid. The unemployment rate sits at 4.3%, largely unchanged over the past year.

GDP growth continues at a healthy pace, powered by strong business investment in AI infrastructure and resilient consumer spending.

Higher-income households have been supported by stock market gains, while lower-income households lean more on credit amid high gas and grocery prices. ⁽⁸⁾

Sources: ⁽¹⁾ ⁽²⁾ ⁽³⁾ ⁽⁸⁾ Federal Reserve, ⁽⁴⁾ ⁽⁵⁾ CNBC, ⁽⁶⁾ ⁽⁷⁾ Reuters