The Federal Reserve held rates at 3.50%–3.75% on Wednesday, while updated projections and Kevin Warsh’s first press conference as Chair shifted attention away from the statement. Officials again described activity as expanding at a solid pace despite uncertainty linked partly to the Middle East conflict, pointing to strong productivity and capital investment, yet they said inflation remains elevated versus the 2% objective, with supply shocks and higher energy prices adding pressure.
The Summary of Economic Projections moved in a more hawkish direction, lifting the 2026 PCE inflation forecast to 3.6% from 2.7% in March, and keeping the return to 2% pencilled in for 2028. The median federal funds rate projection for end-2026 rose to 3.8% from 3.4%, and projected paths were also raised for 2027 and 2028, while growth was trimmed modestly and unemployment was marked slightly lower. Warsh said the statement was shortened and forward guidance removed, and he announced five task forces covering communications, the balance sheet, data sources, productivity and employment, and the inflation framework, with changes to the SEP and a new communications framework possible before year-end; he also declined to publish his own rate projection.
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Market Response and Implications for Investors
Given the Fed’s higher rate path projection of 3.8% for year-end, we see continued pressure on the front end of the curve. The swaps market has already repriced sharply, erasing one of the two rate cuts that were priced in just last week. With the economy adding a surprisingly strong 272,000 jobs last month, betting on lower rates seems like a losing trade for now.
Chair Warsh’s decision to scrap forward guidance injects a significant amount of uncertainty into the market. We believe this will keep implied volatility elevated in the coming weeks, even with the VIX currently sitting near 14. Hedging equity portfolios with index puts or buying VIX call options looks more attractive now than it did before this meeting.
This hawkish stance puts a damper on equity markets, especially for growth-oriented sectors sensitive to interest rates. While Warsh noted the productivity potential of AI, higher financing costs will challenge the valuations of many tech leaders. We are considering protective put spreads on the Nasdaq 100 index as a result.
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Sticky Inflation and a New Data-Dependent Regime
The Fed lifting its year-end PCE forecast to 3.6% is a major signal that they believe inflation is sticky. This aligns with the latest core CPI data, which is still running hot at 3.4% year-over-year. We should look at options on inflation swaps or other instruments that profit if inflation expectations remain stubbornly high through the second half of the year.
With the end of forward guidance, we are now in a truly data-dependent environment where every jobs and inflation report carries more weight. The upcoming review of the Fed’s framework, including the SEP itself, means we must be prepared for more surprises later this year. We will need to be more nimble, using short-dated options to trade around key economic releases.
