Fed Holds Rates Steady, Half of Committee Now Sees Hike by Year-End

Wall Street spent months betting on rate cuts. The Fed just signaled hikes may be next instead.

Kevin Warsh ran his first meeting as Fed Chair on Wednesday, holding rates at 3.5% to 3.75% in a unanimous 12-0 vote. The bigger development showed up in the dot plot.

The Dot Plot Flipped

The dot plot is the Fed's main signal of where each member thinks interest rates are headed. Back in March, the committee was leaning toward cuts.

Every member of the Federal Open Market Committee (FOMC) - the Fed's main policy group - turns in a forecast, and the chart that comes out is closely watched by traders trying to read the room.

This time, half of the members said a hike is coming before year-end, with six of them projecting two hikes.

That's a sharp turn for a market that's been pricing in lower rates for months.

A hike would push borrowing costs higher on mortgages, credit cards, and business loans - the opposite of what most consumers and businesses have been waiting for.

Every morning, Market Briefs breaks down moves like this in five minutes - and you get a free 45-minute investing masterclass when you sign up.

Iran's War Is Pulling Inflation Higher

The Fed pointed to energy supply shocks tied to the war in Iran, where oil and fuel prices have stayed high enough to drag broader inflation up with them.

Energy costs ripple through everything from shipping to grocery prices, which is why the Fed treats them as a major driver of overall inflation.

The Fed now expects inflation to hit 3.6% by year-end, a sharp jump from its 2.7% forecast back in March.

The new forecasts also showed GDP growth trimmed to 2.2% from 2.4%, while unemployment came in a touch lower at 4.3%.

Warsh Resets The Fed's Tone

Warsh used his first press conference to set a new tone, noting that inflation has run above the Fed's 2% goal for more than five years.

"The recent past need not be prologue," he said.

Warsh is also reshaping how the Fed talks to the public, starting with a shorter official statement that cuts old wording and drops forward guidance - the hints about future moves the Fed used to give.

He's also rolling out five new task forces, set to review how the Fed sets policy, how it talks to markets, the data it uses, productivity and the labor market, and what's actually driving inflation.

One thing that won't change: the 2% inflation target. Warsh said there's no reason to touch it until the Fed actually delivers on it.

Worth Noting

For all the talk of a new era under Warsh, Jerome Powell hasn't actually left - he's still on the Board of Governors and voted with the rest of the committee, 12-0.

Markets, meanwhile, came in expecting a path to lower rates and are leaving with a Fed openly leaning the other way.

The Fed meets again in late July, and traders will be watching closely to see if that projected hike actually lands.

If you want this kind of read on what the Fed is actually doing every morning, join 350,000+ investors reading Market Briefs - it's delivered weekday mornings and comes with a free investing masterclass as a bonus.