Wall Street reviews “Waller’s debut: Stance may ‘turn more hawkish,’ but keeping rates unchanged this year remains the ‘base case.’”

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At his first Federal Open Market Committee (FOMC) meeting as the new Fed Chairman, Kevin Warsh quickly put his distinct personal stamp on the Federal Reserve through a series of measures including drastically shortening the policy statement, abandoning forward guidance, and refusing to submit a dot plot of interest rate forecasts.

The biggest surprise of the meeting came from the Summary of Economic Projections (SEP): Among the 18 committee members who submitted forecasts, 9 expect at least one rate hike this year, forming a 50/50 split with the other 9 who predict rates will remain unchanged or be lowered.

The market reacted with a clear hawkish tilt: the market pricing for the federal funds rate at the end of 2026 rose by about 20 basis points after the statement and press conference, the dollar strengthened, and the U.S. Treasury yield curve showed a twisted flattening.

Nevertheless, according to WindChaser Trading Desk, major institutions including Goldman Sachs, Morgan Stanley, HSBC, UBS, and Deutsche Bank all maintain their baseline forecast of no rate change this year.

Institutions generally believe the hawkish camp within the Fed has clearly gained strength. Uncertainty about future policy has risen, but unless inflation worsens further or the job market continues to overheat, holding steady remains the most likely path. Meanwhile, major banks have unanimously raised their risk assessments of a rate hike, believing that Warsh’s push for policy framework review and communications reforms is reshaping the market’s understanding of the Fed’s reaction function.

Institutions Maintain Hold as Baseline, But Raise Rate Hike Risk

Despite the clear hawkish signals, Wall Street banks did not include rate hikes in their baseline scenarios.

Goldman Sachs’s report notes that the risk of a rate hike has increased this year, but the baseline scenario is still unchanged rates.

The bank noted that if upcoming inflation data is concerning and job growth stays strong, most committee members could support hikes; but in their judgement, the majority of the 12 voting members still lean towards unchanged rates, and that if the Iran agreement is reached and the Strait of Hormuz reopens, confirmed geopolitical developments would rapidly remove the main source of inflation risk, making the current dot plot quickly obsolete.

Morgan Stanley’s report maintains its forecast of no change this year and expects rate cuts to begin in March and June next year, but emphasizes this is a "very close call"—if oil prices feed into core inflation or the labor market tightens further, the Fed would not cut rates.

HSBC’s report extends its unchanged rate forecast through all of 2026 and 2027, also pointing out that the hawkish SEP and stronger inflation language tilt risks for short-term rates to the upside, and believes the dollar may have bottomed in 2026.

Deutsche Bank’s report states that a Fed not relying on forward guidance may act more flexibly, creating conditions for rate hikes at future meetings; but at the same time, today’s hawkish signals combined with lower transparency may significantly tighten financial conditions, ironically restricting the scope for hikes in the near term.

Dot Plot Split, Hawkish Shift Exceeds Expectations

The June FOMC meeting passed unanimously 12–0, keeping the federal funds rate target range at 3.50–3.75%. However, the main focus of the meeting was the significant hawkish shift in projections.

This time, 9 members expect rate hikes in 2026, far above the previous expectation of 3. Since Warsh did not submit a dot plot, the 18 forecasts split evenly—9 expect at least one hike (5 anticipate 50+ basis points, 1 expects 75 basis points); 8 forecast unchanged rates, 1 still expects a cut.

The upward revision in inflation forecasts was also significant. The median FOMC forecast for PCE inflation by end-2026 was sharply raised from 2.7% to 3.6%; core PCE inflation from 2.7% to 3.3%. According to Deutsche Bank, almost all members now see inflation risks tilted to the upside. At the same time, the median real GDP growth forecast for 2026 was slightly lowered to 2.2%, and the unemployment rate forecast ticked down to 4.3%.

Morgan Stanley noted its own 2026 core PCE inflation forecast is 3.0%, clearly below the Fed median, which is an important reason it maintains a hold forecast for this year.

Warsh News Conference: Hawkish Tone, Rejects Forward Guidance

Warsh’s first press conference was clearly hawkish in tone but deliberately avoided any specific policy path guidance.

On inflation, Warsh repeatedly emphasized the Fed’s "ability and commitment to achieve the 2% price stability target," and reiterated that "inflation is a choice." According to Deutsche Bank, he mentioned "price stability" as many as 12 times during the conference, and the last line of the policy statement was also simplified to: "The Committee will achieve price stability."

On the labor market, Warsh made no mention of downside risks, said employment data "is moving in a good direction," and stated that "growth driven by strong productivity is not something we worry about, but something we welcome."

According to a UBS report, he also said that current policy is somewhat restrictive in certain areas (such as housing) but that it is difficult to describe financial markets in the same way, attributing this "imbalance" to differences in the transmission mechanisms of the interest rate tool and the balance sheet tool.

Regarding forward guidance, Warsh explicitly stated he has "abandoned forward guidance," and believes "financial markets perform best when reacting to actual data, rather than trying to react to what the Fed will do with the data."

He also revealed he did not submit a dot plot forecast, and holds a reserved attitude about the value of the SEP framework. According to the UBS report, he used the term "working group" as many as 29 times during the press conference.

Five Major Working Groups Launched, Policy Framework Faces Systematic Review

Warsh announced the creation of five working groups covering: 1) the Fed’s communication framework; 2) balance sheet; 3) use and dependence on current data sources; 4) productivity and employment in the era of transition; 5) the inflation framework.

Warsh said the working groups will launch "in the coming weeks", with most expected to reach conclusions by year-end, consisting of both internal Fed economists and external experts.

On communications, Warsh expressed skepticism about the value of the SEP and hinted that the frequency of future press conferences may be adjusted—"Press conferences are useful, but when you hold one, you need to make sure you have something important to say." Morgan Stanley noted that if the chairman himself does not endorse the SEP process, the sustainability of the framework is in doubt. But until the working groups reach conclusions, other members will continue submitting forecasts.

On the balance sheet, HSBC noted the policy statement’s language on reserve management purchases was adjusted to "when appropriate", signaling a more cautious attitude toward SOMA expansion and leaving room for possible balance sheet reduction in the future.

On the inflation framework, Warsh stated clearly that the Fed will not revisit the 2% target itself until the ability to achieve it is re-established.

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The above content comes from WindChaser Trading Desk.

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