In a much-anticipated move, the FOMC voted with 12:0 majority to keep the federal fund rate unchanged at 3.50-3.75%. While all the members submitted their projections, the new Fed Chair, Kevin Warsh refrained from giving projections as well as any forward guidance. He also aims to bring visible changes and has created five task forces focusing on Fed communications, Fed’s balance sheet, use and reliance of Fed’s existing data sources, productivity and jobs in an era of transformation and Fed’s inflation framework.

Growth Remains Solid, Jobs Gain Continues, While Inflation Runs Above 2% Target

Overall growth remains resilient supported by productivity growth and strong capital investment. In Q1 2026, US economy grew by 1.6% on QoQ SA annualized basis, up from 0.5% recorded in Q4 2025. Labour market conditions also remain strong, with about 188,000 average jobs added in the last three months, while unemployment rate remains stable at 4.3%. On the other hand, inflation continues to run above the Fed’s target of 2.0%, with recent month’s CPI and PCE inflation at 4.2% and 3.8% respectively.

Dot Plot Points To One Hike In 2026, Followed By Easing In 2027 & 2028

In 2026, GDP growth is expected to be a tad lower now at ~2.2% compared to March projection at 2.4%. At the same time, unemployment rate is expected to be around 4.3%, while inflation is expected to increase to 3.6% in 2026 significantly higher than 2.7% as per March projections. The dot plot points towards one potential hike in 2026, changed from a cut that was earlier expected.

Muted Market Reaction

The prospect of a rate hike in 2026 led the S&P 500 to fall ~1.2%, 10Y UST yield to rise ~5 bps and DXY to climb above 100 again.

Ionic Wealth View

There are few things we note-

a) the reason for Fed not been able to attain 2% inflation has been evolving from first tariffs to now energy, however, if there are no future one-offs inflation may ease and

b) rate cuts/hikes are almost never a single shock but rather move in a cycle.

Fed will most likely avoid a single hike if cycle turns congenial towards inflation organically. Having said that, normalization of energy supply chain has just started and remains an evolving situation. Equity markets will likely focus on earnings with bond and currency markets awaiting further clarity on inflation. Non-event for EMs right now but a tightening Fed would likely force EM central banks to also follow.

(Source: US Federal Reserve, Ionic Wealth)