The June Federal Open Market Committee (FOMC) decision to keep the target range for the federal funds rate unchanged at 3½ to 3¾ was not a surprise. But the statement—significantly shorter than in April—tilted hawkish, with the committee reaffirming its intention to deliver price stability amid still-elevated inflation, while barely mentioning the employment leg of the dual mandate. Moreover, in the Summary of Economic Projections (SEP), nine policymakers still projected at least one rate hike for 2026.

The response in financial markets was consistent with a perceived monetary policy tightening. Two-year nominal yields jumped about 15 basis points, on net, driven by an even larger move in 2-year real rates. Equity prices fell and credit spreads widened.

It is always difficult to implement changes in central banking, a circle that is conservative by nature. But the world is changing rapidly. Geopolitics, the AI capex boom and the need for supply chain and energy resilience all point to inflationary pressures in the short term. A new Federal Reserve chair provides an opportunity for a lean against the inertia present in the statement, communication and decision making.

A lot has been written about the first FOMC meeting under Chair Kevin Warsh, so I will focus on three main takeaways.

First: Reimagining Communication

For many years, forward guidance served a clear purpose: when the policy rate hit zero during the 2008 financial crisis, the Fed used forward guidance to push down borrowing costs for firms and households. Today, the macroeconomic backdrop has changed. The priority of the Fed is not to fight deflation anymore: amid a growing affordability crisis, high inflation tops the list of concerns of consumers and can influence the outcome of elections.

In addition, forward guidance has been perceived for years by investors as a form of soft commitment by the Fed. In a world of persistent inflation and heightened uncertainty, anchoring markets to the committee’s modal forecast is ineffective, if not counterproductive.

The decision by the committee to drop forward guidance from the statement is a welcome step in the direction of incentivizing investors to price different scenarios and macroeconomic outcomes. It will also prevent the Fed from walking into FOMC meetings cornered by expectations of its own making.

“Financial market prices are probably the most important source of information to guide central bankers. But when all the financial markets are doing is reflecting back what we’ve said, then we’re taking the most important source of information and we’re being blind to it. I’d like us to create a system where those blinders come off, where markets are following data that they efficiently think is reliable,” Chair Warsh said at the June 17 press conference.

But markets still need to understand how the Fed processes information when deciding whether to adjust its monetary policy tools—the so-called reaction function. This is different from forward guidance. A clear reaction function explains how the committee weighs the dual mandate, assesses distance from objectives, and gauges the relative speed of convergence—without explicit guidance about the next policy decision. This kind of transparency remains essential, and it does enhance accountability to Congress and the public. It doesn’t necessarily tie the Fed’s hands; it clarifies how those hands will move in response to incoming information.

Second: Five Task Forces and the Three That Matter Most

Chair Warsh announced five new task forces to address communication, inflation frameworks, balance sheet policy, and other priorities. Without details on who will participate, what outcomes are expected, and how consensus will get managed, these are signals right now rather than solutions. But three bear close attention.

First, communication is a priority. The median dot plots have become focal points for markets rather than tools for understanding policy. Scenario analysis could replace the modal forecast and incentivize investors to think through different outcomes, associated probabilities, and policy paths. The question is: which scenarios, and who sets the odds of different scenarios? These challenges should not be an excuse to avoid tough decisions. Lastly, Chair Warsh suggested he may stop holding press conferences after every meeting, reserving them for when there is something substantive to say. How will they fit into the new communication framework and how will they be used as a signal about policy?

Second, with inflation now 5 years above target, a reassessment of the inflation framework seems overdue, though the scope remains unclear. For example, in a world that appears more prone to supply shocks and persistent inflationary impulses, is there a need for a full rethinking of the framework—like the Fed did with the now-abandoned flexible average inflation targeting? Chair Warsh appeared to suggest there was no reason to revisit the 2% target itself. Indeed, an immediate move to say a 3% target may damage the Fed credibility, because it could be perceived as attempting to cheat its way out of high inflation. But would a symmetric range around the 2% target introduce flexibility amid high macro and policy uncertainty? Should the Fed still look at PCE, or do new measures matter more in an age of rapid technological change? Finally, should the Fed continue to emphasize stability of market-based long-term inflation expectations (which barely moved during past 5 years of inflation overshoot) or should it focus more on survey measures of consumers and firms which convey something about the political economy of inflation?

Third, the balance sheet remains the least transparent piece of the Fed’s toolkit. The central bank needs a clear framework covering objectives, size, composition, market footprint and the relationship to the short-term policy rate.

The statement reaffirmed the committee’s intention to maintain ample reserves in the banking system, so it is unclear whether other frameworks like a return to a corridor as in pre-2008 financial crisis will be considered.

“The second task force, the one on balance sheet policy, will review the benefits and risks of the current ample reserves regime, and the composition of the Fed’s balance sheet. They will assess alternative frameworks for the conduct and operation of monetary policy.” Chair Warsh June 17 prepared remarks.

Equally important is a clear delineation between using the balance sheet for monetary policy versus financial stability. With the U.S. fiscal outlook continuing to deteriorate, a discussion about the lender-of-last-resort function and the use of the balance sheet for financial stability purposes (touching on issues such as objectives, tools, communication) is crucial to maintain independence and avoid financial repression.

Three: The Stealth Easing Question

With inflation 5 years above the Fed 2% target after a series of supply shocks, a hawkish statement, and half of the committee projecting at least a rate hike this year, why did the Fed leave interest rates unchanged? Chair Warsh didn’t provide the answer, leaving investors speculating on internal committee dynamics and the role task forces might play in upcoming decisions. But this disconnect matters.

The practical effect is a stealth easing of monetary policy: steady nominal rates with rising inflation means falling real rates. Financial conditions remain easy amid robust risk appetite. The Fed appears to be betting that productivity gains will offset inflationary pressures while growth remains strong. That bet on accelerating productivity is visible in the SEP: GDP slightly above its longer-run growth rate, unemployment near equilibrium, inflation declining to target by end-2028 as policy rates fall.

The lack of a clearly communicated reaction function sets the stage for more volatility in coming months, so buckle up! Markets now anticipate about 2 hikes by next spring with some market participants Bank of America projecting an even higher three hike cycle before year end. How the conflict in the Middle East will evolve and upcoming economic data will test those assumptions. The Fed has an opportunity, through a transparent reframe of its communications and these task forces, to improve its accountability. Whether Chair Warsh uses it or not, will define policy credibility.

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