The Federal Reserve kept interest rates unchanged in its first policy decision under Chair Kevin Warsh, but signaled that rate hikes could come later this year. The move sent U.S. equities lower and pushed betting markets further into a no-cut camp for 2026.
First Decision Under Warsh
The Federal Open Market Committee voted to hold the federal funds rate at its current level, a decision widely expected by markets. This marks the first rate-setting meeting chaired by Kevin Warsh, who took the helm earlier this year. The statement released after the meeting noted that inflation remains above the central bank's target, while economic activity continues to expand at a solid pace.
While the Fed left the door open for rate cuts if conditions warrant, the tone of the statement leaned hawkish. The committee explicitly said it would consider raising rates if inflation does not show sustained progress toward the 2% target. “We need to see more data before declaring victory on inflation,” the statement said, though Warsh did not give a press conference following the decision.
Market Reaction
U.S. stocks fell after the announcement. The S&P 500 dropped roughly 1.2%, while the Dow Jones Industrial Average lost about 300 points. Bond yields edged higher as traders reduced bets on near-term easing. The yield on the 10-year Treasury note rose to 4.35%.
Polymarket, a prediction market platform, showed that the odds that the Fed will deliver zero rate cuts in 2026 surged to 82.9% following the decision. That's up from about 60% a month ago. The market now assigns a roughly 17% chance of at least one quarter-point cut next year.
What's Driving the Hawkish Turn
The Fed's shift reflects a string of stronger-than-expected economic data. Job growth has remained robust, consumer spending has held up, and core inflation measures have stopped falling. Several Fed officials had publicy voiced concerns that easing too soon could reignite price pressures.
Warsh, in his first public remarks after being sworn in, had emphasized that he wanted to see clear evidence that inflation is sustainably moving toward 2% before loosening policy. The statement on Wednesday echoed that caution.
Next Steps
The Fed's next meeting is scheduled for mid-June. By then, policymakers will have two more inflation reports and another jobs number to assess. Chair Warsh will hold a press conference after that meeting, giving him a chance to explain the committee's thinking in more detail. Markets are now pricing in roughly a 70% chance of a rate hike at that June meeting, according to CME FedWatch.
