Fed admits inflation is now higher due to war, and rates more likely to go up, not down

Today marked the first meeting of the Federal Reserve's Open Markets Committee (FOMC) since Kevin Warsh took over as Chair from Jerome Powell. That in itself would warrant attention, but there's also been quite a bit of economic upheaval since the Fed last met in late April, and it would also include the first release of the Fed's economic projections for the future in the last 3 months.

The Fed made its call at 2pm Eastern, and Warsh met the media soon after.

Did the Fed do a surprise rate hike? Nope, they kept the Fed Funds rate at the same 3.5%-3.75% range that it has been in for the last 6 months. So why did the market tank after the widely expected decision to keep rates the same? Because the outlook got tighter.

Pushing US equities to the downside was news that nine out of 18 FOMC members who submitted economic projections — with Warsh as the sole member sitting out — see a rate hike coming by the end of the year. The projections pushed traders to fully price in one quarter-point hike by year-end, per Bloomberg data.

Policymakers had projected one 2026 rate cut in March, but the job market has firmed, and inflation has risen to the highest level in three years, pushed up by higher energy prices from the conflict in the Middle East.

Investors are also debating whether the blocked oil flows through the Strait of Hormuz could be cleared quickly, as they weigh the US-Iran interim deal to end their conflict. After agreeing on a draft 14-point memorandum, the two sides aim to formally sign an agreement on Friday.

The FED's "dot plot" of FOMC opinions shows that half of those 18 members thought there would be at least one increase of the Fed Funds rate from current levels for the rest of the year, and almost all of the rest thought rates would stay at their current range.

And the FOMC’s new economic projections show how their inflation expectations went up over the 3 months that the US has stayed at war in Iran.

That's a serious slide to the right - nearly 1% higher than March's projections for this year, and inflation staying higher from a more expensive base in 2027.

Another reason for this afternoon's drop on Wall Street is that traders took positive talk from Warsh on the labor market as reason to think recession wasn’t going to happen any time soon.

"The [Federal Open Market Committee] thought that the labor markets were stable," Warsh said. "There were some people around the committee who thought that it was trending better than that."

"Trends matter more than data points," Warsh continued, adding that "the jobs data has been moving in a good direction." Fed officials now predict a 4.3% unemployment rate for the rest of the year, an improvement from earlier estimates.

And good news for the labor market is bad news if you're a coked-up, debt-laden bro that wants rate cuts. Now if workers start to get any kind of pay raise with those jobs? Those guys will lose it!

The next Fed meeting comes at the end of July. By then, we'll know what the effect of this panicked giveaway Memorandum of Understanding with Iran will have on oil supplies and gas prices....assuming it ever ends up being followed, of course. And we'll see if consumers and businesses have changed their habits as the Summer has dragged on.

But for now, it's wait and see for the Fed, and to figure out what they want to do in a time of cost-based inflation, but also with a President and his newly appointed Fed Chair who aren't likely to be OK with money being tightened up so much that we fall into recession by the time voters go to the polls in November.