The Federal Reserve kept the federal funds rate at 3.50 percent to 3.75 percent on Wednesday in a 10-2 vote that markets read as a hawkish pause, with the median 2026 projection dropping to one 25 basis point cut and Powell describing the path ahead as highly uncertain and, in fact, unknowable.
The Decision and the 10-2 Vote
The Federal Reserve held the federal funds rate at 3.50 percent to 3.75 percent for the second straight meeting, a decision that looks like a pause but reads like a commitment. The 10-2 vote was the most fractured of the year, with two members dissenting in favor of a 25 basis point cut while the rest of the Committee voted to hold. Markets had been pricing two cuts for 2026 going into the meeting; the new median projection is now one cut, and the dot plot dispersion has widened at the long end of the distribution. The S and P 500 closed at 6,827.19, up 44 points on the day, a counter-intuitive rally that reflects relief that the Fed did not pivot, not optimism about easing. The 10 year Treasury yield ended at 4.29 percent, unchanged on the session, as the long end absorbed the supply without breaking.
What the Inflation Print Just Did
Core PCE inflation came in at 3.10 percent in January 2026, up from 3.0 percent in December 2025, and that one tenth of a percent is the entire story. The Fed has described current inflation as somewhat elevated, a phrase that Powell repeated in the press conference, and the upward tick in core PCE gave the hawks the cover they needed to hold the line. The supercore services measure, which strips out housing and energy, has been running near 3.4 percent for three consecutive months. Wage growth, at 4.1 percent year over year, remains inconsistent with the Fed’s 2 percent target on a sustainable basis. The Committee’s projections now show inflation returning to 2.0 percent only in 2028, a one-year delay from the December SEP.
The Dot Plot Is Now a One-Cut Median
The March Summary of Economic Projections carried a median of two 25 basis point cuts in 2026, anchored at a 3.13 percent midpoint. The June SEP now shows one cut, anchored at 3.38 percent, with the longer run dot unchanged at 2.875 percent. The dispersion is the story. Three participants are now above 4.00 percent for year end 2026, and three are below 3.00 percent. The central tendency no longer matters as much as the tails. For the bond market, that means the front end will trade on data prints, not on the dot plot, and the long end will trade on the term premium, not on Fed policy. The 2s10s spread ended the day at 18 basis points, the flattest since March 2023.
Why the Front End Is Range-Bound
Federal funds futures are now pricing the first cut into the fourth quarter, with September at 38 percent odds, down from 56 percent a month ago, and December at 71 percent. The 2 year Treasury at 4.04 percent is pricing roughly one cut by mid-2027. A median dot plot that revises the 2026 path down to one cut, paired with a longer run dot unchanged at 2.875 percent, lets the front end run, the long end bear-flatten, and the dollar firm. The trade is not the policy rate. The trade is the slope. A flat-curve environment through August favors 5s30s steepeners, high quality corporate credit over duration, and a quiet bid for gold. The dollar index ended at 104.1, and gold closed at 4,302 an ounce, both steady on the session.
What to Watch in the Next Two Weeks
The next two weeks are heavy. JOLTS job openings on Tuesday, the FOMC minutes on Wednesday, University of Michigan inflation expectations on Friday, and a 20 year Treasury reopening on Monday. May nonfarm payrolls land on July 3, the Q1 ECI wage report on July 31, and Jackson Hole opens August 22. Powell’s first real test is the September SEP. The June decision was a hawkish pause, not a pivot, and the market that priced two cuts a month ago now has to reckon with one. The era of aggressive easing is not imminent, and the Fed has made that point with a 10-2 vote and a dot plot that tells the bond market exactly how long the wait will be.