The Fed's Credibility Problem — Kevin Warsh's First 100 Days

Finance Explained Simply

The Deep Dive

Full analysis · Week of 21 June 2026 · 12 min read

In this issue

01 — The FOMC Decision

The Fed Held Rates at 4.75–5.0% — But the Statement Was Anything But Neutral

The Federal Open Market Committee voted unanimously to hold the federal funds rate at 4.75–5.0% at its June meeting. This was expected. What was not expected: the statement dropped the phrase “restrictive stance of monetary policy” and replaced it with language noting that “additional firming may be appropriate if inflation progress stalls.” In central bank language, this is a seismic shift.

The Fed’s dot plot — the projection of where officials expect rates to go — showed the median expectation had moved from two cuts in 2026 to zero. Ten of the nineteen FOMC members now project at least one rate hike before year-end. Markets had been pricing in roughly 1.5 cuts by December. Those bets were unwound rapidly: the 2-year Treasury yield rose 14bps on the day.

02 — The Rate-Cutting Mistake

The Fed Cut Rates Three Times in 2024–25. Inflation Re-Accelerated. This Is the Damage.

Under Jerome Powell, the Fed began cutting rates in September 2024, reducing the federal funds rate from 5.5% to 4.25% across three meetings. The rationale: inflation was trending down, the labour market was cooling, and the Fed wanted to achieve a “soft landing.” By early 2025, market consensus believed the fight was won. It was not.

Services inflation proved sticky. Fiscal stimulus continued to flow through the economy. The labour market never meaningfully cooled. And lower borrowing costs re-ignited spending in rate-sensitive sectors — housing, auto, credit cards. PCE, which had reached 2.5% by mid-2024, began climbing again and is now back at 3.8%. Kevin Warsh, appointed Fed Chair in March 2026, inherited an institution that needs to rebuild its anti-inflation credentials.

The lesson is not that the Fed was reckless — the data available in late 2024 made the cuts look reasonable. The lesson is about the limits of forecasting in complex systems. Inflation is not a straight line. Cutting too early, even on good data, can undo months of progress.

◆ Concept of the Week

Forward Guidance — How Central Banks Move Markets with Words

Forward guidance is the practice of central banks communicating their expected future policy path to markets — not just what they are doing today, but what they plan to do tomorrow. Done well, it allows markets to price rate expectations into long-term bonds and mortgages today, amplifying the effect of monetary policy beyond just the overnight rate. Done poorly, it can destroy credibility: when the Fed said rates would be “transitory” in 2021, then had to hike aggressively, it spent years rebuilding trust. Every word in an FOMC statement is calibrated for exactly this reason — which is why markets move on the removal of a single adjective.

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