June 2026 Fed & Rates Call Update

Goodbye forward guidance, hello task forces (and vol)

The winds of change are clearly blowing where price stability at all costs = vol

Summary

• Although the Fed Funds target range was held at 3.50–3.75% at Warsh’s first FOMC meeting, he clearly surprised us (and markets) on several fronts. The statement was massively shortened, forward guidance was eliminated (apart from the continued, but reluctant, release of the SEP) and Warsh refrained from submitting his own SEP forecasts (dots).

• Warsh’s broader framework hopes to bring about a philosophical reset, establishing five major “task forces” (communications, balance sheet, data, productivity/AI, and inflation frameworks) designed to rethink core operating assumptions. Across Q&A, his tone consistently emphasized institutional reform while sidestepping pressure to offer a concrete view on his outlook (or that of the FOMC) nor the trajectory of the economy.

• It’s unclear what the new reaction function is geared towards (other than being purely data dependent). This introduces vol after years of the Fed suppressing it via forward guidance and QE. This leaves us with questions unanswered (but we surmise that’s the goal for this new Warsh-led Fed).

• However, if the SEP dot plot might be done away with, and given many of the rates submissions are from non-voters, why should we keep paying attention to the dots (esp. if the chair doesn’t participate in it)? Since there is a deliberate attempt to break from Fed communication norms (e.g., instead of guiding expectations, the Fed should learn from markets, not have market mirror Fed guidance) many market participants (traders algos, strategists and economists) will need to reprogram their approach.

• Market Impact: Radically different communication style (short but not sweet), with hawkish undertones (lingering from the SEP dots) was too much to handle causing the largest front-end UST selloffs since 2008 and curve flattening at an FOMC event. Welcome to the Vol-thunderdome! Inflation expectations continued to decline while real rates remain high, keeping the dollar bid as well as the backend of the curve supported. We think given that the long-run dot stayed at ~3% along with the hawkish tone helped from a credibility standpoint, driving L/T USTs to rebound.

• House View: We thought Warsh’s would be more neutral (see link) and take a gradual approach. Clearly, we were wrong. Moreover, we believed the turn in energy prices would have kept the hawks at bay but instead they put in multiple hikes. At this juncture it will be difficult for the Fed to restart hiking but at same time easing expectations need to be pushed back too. We push back cuts to restart in December, after midterms and after the data once again proves the economy is weaker than televised.

Source: MUFG US Macro Strategy