WASHINGTON, DC — The Federal Reserve held the federal funds rate at 3.50 percent to 3.75 percent for the seventh consecutive meeting on Wednesday, with Chair Kevin Warsh presiding over his first Federal Open Market Committee since being confirmed in May of 2026. The vote was unanimous, twelve members in favor and none opposed. Markets had priced the decision with a 97 percent probability according to CME FedWatch, leaving the dot plot itself as the focal point for traders positioning into the second half of the year and into the September summary of economic projections.
The Dot Plot Flips From a Cut to a Hike
The median 2026 projection shifted to 3.75 percent from 3.40 percent in March, with three participants now showing a hike to 4.00 percent or higher for year-end. The September median implied in March of 3.10 percent has now moved to 3.40 percent, and the December median implied in March of 2.90 percent is now at 3.30 percent. Warsh declined to submit his own dot during the meeting, citing what he called the illusion of precision in projecting the path of policy in a year that has already delivered a Middle East peace deal, a 2.4 percent swing in the dollar index, and a 30 percent move in front-end oil. The omission was the first by a sitting Chair since the practice was adopted in 2012, and traders read it as a deliberate signal that the framework will be retired within eighteen months under his leadership.
Curve Reaction and the Dollar Trade
U.S. Treasury yields rose on the hawkish dot, with the 10-year note climbing six basis points to 4.32 percent. The 2-year note added eight basis points to 4.05 percent, leaving the 2s10s spread at twenty-seven basis points, the flattest since March of 2023. The dollar index strengthened to 104.20 as traders reduced bets on a September cut. Equity markets sold off modestly, with the S&P 500 closing down 0.55 percent and the Dow Jones Industrial Average losing 0.38 percent after touching a record intraday high earlier in the session. Gold rose eleven dollars to 4,300 an ounce as real yields pushed higher. West Texas Intermediate crude closed at 74.20 a barrel, down 1.8 percent on the day as the Iran peace deal removed a tail premium that had built up since May.
The two-year, five-year forward breakeven inflation rate fell four basis points to 2.43 percent, the lowest since January, even as the median dot for end-2026 implied a tighter policy stance. The committee’s preferred gauge, the personal consumption expenditures price index, was forecast at 3.0 percent this year, up from 2.7 percent in March, while core PCE was forecast at 2.9 percent, up from 2.8 percent. The unemployment projection was lowered to 4.2 percent from 4.3 percent, and the growth projection was lifted to 2.1 percent from 1.9 percent.
What to Watch in the Next Two Weeks
The May personal consumption expenditures price index, due June 27, is the next hard catalyst. Core PCE above 0.27 percent month over month would lock in the median 2026 dot at 3.75 percent and validate the hawkish pause. Below 0.25 percent would reopen the door to a single cut. Markets also await the European Central Bank Sintra Forum June 24 to 26, where policymakers will debate whether the euro-area disinflation story still holds with services running at 3.8 percent. The Bank of Japan meets June 18 to 19, with a 50 percent probability of a 25 basis point hike to 1.00 percent. Until then, the front end is range-bound, the long end is the trade, and the policy reaction function just got hawkish.