Fed Chair Walsh Debut: Downplays Forward Guidance, Sticks to 2% Inflation Target

At 2:00 AM 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 expectations.

The post-meeting statement noted inflation remains elevated, the Fed continues to aim for price stability, and described economic growth as "solid." Officials also said productivity growth and capital investment are strong. The statement was more streamlined than previous ones, seen as a signal of Walsh's push for communication reform.

Policymakers adjusted March economic forecasts: raised median inflation forecast for this year from 2.7% to 3.6%, and core inflation forecast for 2026 from 2.7% to 3.3%. Meanwhile, median GDP growth forecast for 2026 was cut from 2.4% to 2.2%, and median unemployment rate forecast for end-2026 was lowered from 4.4% to 4.3%.

Fed Chair Walsh, at his first policy meeting since taking office, pledged to restore price stability. Earlier, Fed officials held rates steady and signaled support for a rate hike this year.

Walsh said at the press conference that persistently high prices are a burden on Americans, but officials are clear and united, and the FOMC is committed to price stability. He downplayed the importance of the dot plot, saying the market and officials lack sufficient confidence in the forecasts themselves.

The dot plot showed 9 of 19 officials expect at least a 25bps rate hike this year, with 6 expecting at least two hikes; another 9 expect rates to remain unchanged or be cut. Walsh himself did not submit a rate forecast.

Communication Framework Overhaul: Abandoning Forward Guidance

Walsh made clear the Fed has abandoned forward guidance, deeming it no longer suitable for the current situation. He noted press conferences are still useful, but adjusting communication methods in the future would be valuable, and a new communication framework by year-end would not be surprising.

He also said the dot plot is of limited help in executing policy, and the FOMC does not consider itself bound by rate forecasts, so he did not provide a dot plot forecast.

Sticking to 2% Inflation Target, Preventing Second-Round Effects

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

He also noted that most of the data the Fed relies on comes from outdated survey methods, which is an area needing reform.

Establishing Five Special Working Groups for Institutional Reform

To address current challenges, Walsh announced the formation of five special working groups on monetary policy areas, expected to complete most work by year-end.

These include: a Communication Working Group to advise on adjustments to the Summary of Economic Projections (SEP); a Balance Sheet Working Group to assess appropriate reserve responsibilities; a Data Sources Working Group to address data lag; a Productivity Working Group specifically examining AI's impact on productivity; and an Employment Working Group focusing on labor market dynamics. Additionally, an Inflation Working Group will specifically examine inflation drivers.

Independence, External Relations, and Market Pricing

Walsh stressed that the Fed will never hand over decision-making to any outsider. He revealed he has had three breakfasts with Treasury Secretary Bessent and has met with the Fed Inspector General, who will release a report on the Fed building renovation this summer.

Regarding markets, Walsh said market reactions to real-time data are usually most effective, and market prices themselves are important reference information.

Market Reaction: Stocks, Dollar, and Treasuries Fluctuate

US stocks fell Wednesday, with the Dow dropping about 500 points, tech heavyweights leading declines, and Treasury yields surging. Several Fed officials hinted at possible rate hikes this year to curb inflation, increasing investor uncertainty about the monetary policy path.

As of June 18 close, the Dow fell 507.12 points (0.98%) to 51,492.55; the Nasdaq fell 354.68 points (1.34%) to 26,021.65; the S&P 500 fell 91.25 points (1.21%) to 7,420.

The US dollar index posted its biggest gain in three months. USD/JPY rose 0.14% to 160.65; GBP/USD fell 0.99% to 1.3293; EUR/USD fell 0.92% to 1.1501. In US bond markets, short-term Treasury prices fell sharply, with the 2-year yield rising to 4.20% at one point, signaling a repricing of rate hike expectations.

By institution, Natixis viewed the statement as hawkish overall; Goldman Sachs noted that despite falling oil prices, half of officials expect a rate hike as early as this year, and future inflation data remains key; "Fed whisperer" Nick Timiraos said the dot plot and statement revisions both showed a clear hawkish tilt, likely forcing a reassessment of market rate path expectations.