Fed's Walsh Debut: Downplaying Forward Guidance, Reaffirming 2% Inflation Target

At 2:00 a.m. Beijing time on June 18, the Fed announced it would keep the federal funds rate target range unchanged at 3.5% to 3.75%, the fourth consecutive hold this year, in line with market expectations.

The post-meeting statement noted that inflation remains elevated, the Fed continues to be committed to achieving price stability, and described economic growth as "solid." Officials also mentioned strong productivity growth and capital investment. Compared to previous statements, this one was more streamlined, seen as a signal of Walsh's communication strategy reform.

In the latest economic projections, policymakers raised the median inflation forecast for this year from 2.7% to 3.6%, and the 2026 core inflation forecast from 2.7% to 3.3%; meanwhile, they lowered the 2026 GDP growth forecast from 2.4% to 2.2% and the end-2026 unemployment rate forecast from 4.4% to 4.3%.

Walsh's First Press Conference: Downplaying Dot Plot, Emphasizing Policy Independence

After his first policy meeting since taking office, Walsh said the Fed will restore price stability. He noted that persistently high prices are a burden on Americans, but the Federal Open Market Committee (FOMC) is committed to achieving price stability.

He also downplayed the significance of the latest rate projections. The dot plot showed that 9 of 19 officials expect at least one rate hike this year, with 6 expecting at least two hikes; 9 others expect rates to remain unchanged or to be cut. Walsh said other officials are also not very confident about their forecasts, and the economic outlook remains highly uncertain.

Walsh also stated explicitly that he refused to submit rate forecasts and believes forward guidance is no longer appropriate for current conditions. He thinks the dot plot has limited use for policy implementation, and while press conferences can continue to play a role, there is still room to adjust their communication format in the future.

Fed Reform Direction: Establishing Five Special Task Forces

To address current challenges, Walsh announced the formation of five monetary policy-related special task forces, expected to complete most of their work by the end of the year.

These task forces will focus on communication framework, the balance sheet, data sources, productivity, and employment. Among them, the productivity task force will specifically examine the impact of AI on productivity. Walsh also mentioned that the inflation task force will review the drivers of inflation, and the data sources task force will work to address data lag issues.

On the inflation target, Walsh emphasized that the 2% inflation target is the Fed's long-term goal and there is no reason to reassess it until it is achieved. He noted that the Fed cannot significantly affect supply shocks like energy, and its core task is to prevent "second-round price effects."

He also said that most of the data the Fed currently relies on come from outdated survey methods, and the relevant data system also needs reform. Additionally, Walsh stressed that the Fed will never delegate decision-making power to any external person.

Market Reaction: Increased Volatility in Stocks, Dollar, and Treasuries

Affected by the Fed's hawkish signals, U.S. stocks fell on Wednesday, with the Dow dropping about 500 points, tech heavyweights leading the decline, and bond yields surging. The Dow fell 507.12 points, or 0.98%, to 51,492.55; the Nasdaq fell 354.68 points, or 1.34%, to 26,021.65; the S&P 500 fell 91.25 points, or 1.21%, to 7,420.

In the forex market, the dollar index posted its biggest gain in three months. USD/JPY rose 0.14% to 160.65 yen, GBP/USD fell 0.99% to 1.3293 dollars, EUR/USD fell 0.92% to 1.1501 dollars.

In the U.S. bond market, short-term Treasury prices fell sharply, and the yield curve flattened sharply, with the 2-year yield rising 15 basis points to 4.20%, the highest since February 2025.

In commodities, oil prices recovered slightly after two days of sharp declines, with WTI crude up 1% at just under $77 per barrel, and Brent crude closing below $80 per barrel.

Institutional Views: Market Rate Hike Expectations Heat Up

Natixis believes this is a clearly hawkish statement. While rates were kept unchanged, the easing bias was removed, and the statement was significantly streamlined, conveying a stronger price stability signal overall.

Goldman Sachs Asset Management analysts said the decision shows the Fed's hawkish shift is not solely driven by energy prices. Despite the recent pullback in oil prices, half of the officials still expect a rate hike as early as this year, due to still-strong labor market and inflation data.

Nick Timiraos, the "Fed whisperer," noted that this dot plot is clearly hawkish, and the policy statement was comprehensively revised from start to finish, with a notably shorter text. Market expectations for the future rate path may therefore be recalibrated.

Editor: Ding Wenwu