The Fed holds rates steady in June; HSBC expects monetary policy to remain unchanged this year

• June FOMC meeting decision: The US Federal Reserve kept the federal funds target rate unchanged at 3.50%–3.75%, marking the fourth consecutive meeting on hold, in line with market expectations.
• Statement changes: The policy statement was significantly condensed, and previous key wording indicating possible future rate cuts was removed. The Fed noted that economic activity continues to expand with unemployment remaining largely unchanged, despite elevated uncertainty driven by the conflict in the Middle East.
• Dot plot: Of the 19 FOMC participants, 18 submitted interest-rate projections for 2026–2027, with 9 anticipating at least one rate hike this year.
• Market reaction: Following the announcement, all three major US equity indices declined. Both the S&P 500 and Nasdaq were down more than 1%, while the Dow also declined by nearly 1%. The US dollar strengthened, with the DXY breaking above 100. The 10-year US Treasury yield approached 4.5%, while the more rate-sensitive 2-year yield jumped by more than 17 bps at its peak, reaching around 4.2%.

• The Federal Reserve updated its Summary of Economic Projections (SEP), raising its inflation and interest-rate forecasts while lowering its economic growth outlook.
• Interest rates: The latest median target for the federal funds rate for this year is projected at 3.80%, up from the 3.40% expected in March, which is 0.25% higher than current levels.
• GDP growth: GDP growth this year is projected at 2.2%, down from 2.4% in the March forecast.
• Inflation: The forecast for core PCE inflation this year was raised from 2.7% to 3.3%.

• Chair Warsh attended his first post-meeting press conference. He confirmed that did not submit an interest-rate path projection and said the Fed has shifted away from forward guidance. He noted that inflation remains well above the Fed’s 2% target.
• Warsh also announced a first-principles review of policy and the appointment of five special task forces, including:

1.Communications: Review and propose reforms to communication formats, including the SEP.

2.Balance sheet: Assess the risks and benefits of the current “ample reserves” regime and the operating framework for the balance sheet.

3.Data: Seek more accurate “real-time data” than traditional surveys, reducing reliance on historical economic data that is frequently revised.

4.Employment: Examine the far-reaching impact of emerging general-purpose technologies (e.g., AI) on the economy, employment, and inflation.

5.Inflation framework: Study the underlying drivers of inflation and how to achieve price stability in a changing economy.

• The latest inflation forecasts and the dot plot suggest officials have adopted a more hawkish stance than before, lifting expectations of further rate hikes. According to CME data, the market now expects over an 80% probability of at least one rate hike this year (up from 70% a week ago). The probability of two or more hikes has increased from 20% a week ago to around 40% now.
• However, HSBC believes the market may be overestimating the outlook for US growth and inflation. We therefore maintain our expectation that the Fed will keep rates unchanged in both this year and next. The future direction of policy will be primarily determined by the inflation trend, with energy prices being an important factor.

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