The Big Idea

The dramatic shift at the Fed

| June 26, 2026

This material is a Marketing Communication and does not constitute Independent Investment Research.

A new Chair of the Fed has led to a sea change in the approach of the Federal Open Market Committee. Several details from the June FOMC led to a noticeable shift in the assessment of the policy outlook. There were three key developments that point toward a more hawkish path for the federal funds rate target—the dots, inflation projections and commitment to mandate.

Ascending dots

The consensus expectation going into the June FOMC meeting was that the median “dot,” the policy projections from FOMC participants, for 2026 would move up from calling for a single rate cut this year to no change in policy.  However, the rise in the dots was significantly greater than anticipated (Exhibit 1).

Exhibit 1: FOMC Dot Projections for 2026

Source: Federal Reserve.

As the table shows, in March, the committee was split between those who thought that the Fed should remain on hold all year (the seven most hawkish officials) and those who thought the Fed should cut modestly (a majority of 12).  Seven of the 12 projecting easing called for a single quarter-point cut, while five were expecting multiple cuts (the 2.625% dot belonged to Governor Miran, who is no longer on the FOMC).  In March, not a single one of the 19 participants projected a rate hike this year.

In advance of the June FOMC meeting, I suspected that there would be a few doves calling for a rate cut or maybe two this year, a majority calling for no change, and a handful, maybe up to half a dozen, looking for a single rate hike.

Instead, the projections moved higher by significantly more than that.  Of the 18 submissions, half called for a rate hike or hikes and half did not.  Of the nine who did not expect an increase, eight called for no change, while a single “lonesome dove” forecast a rate cut.  In contrast, of the nine projecting tightening, six called for multiple moves.  There were three policymakers expecting a single rate hike, five looking for two moves, and one official calling for three hikes (there are only four more FOMC meetings this year).

As a result, the median dot moved from 3.375% to 3.75% (the middle two dots were split, with one at 3.625% and the other at 3.875%).  Moreover, the average of the dots jumped by nearly 50 basis points in June, from 3.35% in March to 3.83%.

It is a little ironic that the shift in the dot projections reflects the views of the rest of the committee, not Chair Warsh.  Warsh does not believe that the SEP projections in their current format are helpful and declined to offer his own forecasts.

Inflation projections

The increased urgency exhibited by the surprisingly large shift in the dot projections likely reflects two other developments from the June FOMC meeting.  The first one is a sharp upward move in the FOMC inflation projections.  The median inflation estimates for 2026, for both headline and core PCE inflation, were revised markedly.  The Q4/Q4 expected advance for headline inflation went from 2.7% in March all the way to 3.6% in June.  In my view, this may be a bit too much, though to be fair, as I write, I have the benefit of about 10 extra days, during which oil and gasoline prices have fallen significantly. The June Blue Chip Economic Survey, conducted in early June, had a median forecast of 3.7%.  After the May PCE figures were released on Thursday, my estimate is only 3.1%, as I seem to have a much more optimistic assumption about the path of energy prices than most Fed officials and other private sector economists.

Similarly, the median FOMC projection for the core PCE deflator for 2026 on a Q4/Q4 basis jumped from 2.7% in March to 3.3%.  This is in line with the June Blue Chip consensus and marginally below my estimate of 3.4%.

Given that Fed officials have extensively discussed temporary factors elevating inflation, most notably tariff-related passthrough and more recently the ripple effects of the energy price shock, it is not necessarily shocking that inflation estimates for this year are far above the 2% inflation target.

However, the upward movement for core inflation in 2027 was an even more telling development.  The median FOMC projection for core PCE inflation next year moved from 2.2% in March to 2.5% in June.  Again, the Fed’s forecasts are not that different from the private sector consensus.  The June Blue Chip Economic Survey median was 2.3%, and I am currently calling for 2.4%.  Nonetheless, I would judge the assessment of an overshoot of half a percentage point for core inflation next year, by which time the temporary factors noted just above should have dissipated, as a statement that the current policy stance is not getting the job done with regard to inflation.

Commitment to the mandate

The final striking feature of the June FOMC meeting was Chair Warsh’s heightened embrace of the Fed’s commitment to hitting its inflation target.  Warsh noted that the Fed has missed the inflation target for five straight years.  And I would add that it has not even been close.  The lowest reading over the past five years has been 2.6%.  He has consistently argued over the years that the Fed’s commitment to price stability is its most important job.  And he has been clear that achieving 2% inflation is within the Fed’s power.

In contrast, for better or worse, Chair Powell and numerous other Fed officials have spent the past five years offering reasons why elevated inflation would taper off soon, once temporary factors subsided.  A less charitable characterization would call this a litany of excuses as to why the inflation misses were not the Fed’s fault.  The dialogue had begun to remind me of the Fed commentary in the 1970s. Those policymakers also constantly offered reasons for high inflation that were outside of the stance of monetary policy, and the Fed in that era never quite did enough to get prices under control.

In any case, Warsh emphatically declared that the FOMC takes its inflation mandate seriously, that it is capable of hitting its target, and that it will.  Couple that with the projection that the five straight years of misses are likely to extend to six (2026) and probably seven (2027), and the obvious conclusion is that Warsh and the Fed intend to act forcefully, likely sooner rather than later.

Changing Fed call

On the back of these themes revealed at the June FOMC meeting, I made a significant change to my Fed call.  I came into 2026 expecting the Fed to be on hold all of this year and to raise rates by 50 basis points in 2027.  This forecast was driven by a set of economic estimates that called for well above-trend real GDP growth in both 2026 and 2027, a firming labor market, and stubbornly high underlying inflation.  In contrast, the consensus at the time, including within the FOMC, was that real economic growth would be in line with trend, that the unemployment rate would be stuck around 4.5%, and that inflation would settle back to 2% once the temporary boost from tariff costs dissipated.  As a result, the prevailing view was that the FOMC would ease modestly over the next two years, bringing the funds rate target in line with estimates of the longer-run neutral rate of around 3%.  The median FOMC dots as late as March had one ease this year and one more next year.

The presumed inflationary impact of the Middle East conflict shifted thinking in the financial markets.  Even before the June FOMC meeting, notwithstanding a sense that Kevin Warsh would probably lean dovishly, fed funds futures were beginning to price in some chance of a rate hike before year-end.

The renewed urgency with which Warsh signaled the Fed would attack inflation convinced me that the patience of policymakers has been exhausted.  As a result, I look for the FOMC to accelerate the timetable of the modest rate-hiking needed to bring inflation to heel.  I moved the two quarter-point hikes that I had previously penciled in for next year to September and December of this year, bringing the fed funds rate targets to 4.125% by year-end.  I then have the Fed holding at that restrictive policy stance for all of 2027 in an effort to wring inflation pressures out of the economy.

Chair Warsh’s antipathy toward forward guidance leaves economists and financial market participants flying blind when it comes to the near-term policy outlook.  The norm in the Yellen and Powell years had become that the FOMC would signal its intentions, particularly when it was looking to raise rates, well in advance in hopes of avoiding a disruptive surprise.  Now, we are all left to guess about the committee’s intentions.  The case that I have laid out here could just as easily justify immediate rate hikes, say in July and September, rather than my projection of September and December.  I do not rule that out.  There are two reasons that I expect the Fed to be slightly more cautious.  First, officials may want to wait for the end of the 60-day period of the Memorandum of Understanding between the U.S. and Iran to see how developments evolve in the Middle East.  Second, energy prices have already begun to come off sharply, and the next couple of monthly headline inflation readings are likely to be quite benign.  Policymakers may want to see how, if at all, the reversal of energy prices impacts core inflation.

These factors point to the Fed acting soon but not necessarily urgently.  Nonetheless, I would not be shocked by a July rate hike.  I would also not rule out more rate hikes than what I currently have penciled in if inflation pressures prove harder to root out than I expect.  The bottom line is that the Warsh FOMC appears to be very different than the Powell FOMC.

Stephen Stanley
stephen.stanley@santander.us
1 (203) 428-2556

This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.

This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.

Important Disclaimers

Copyright © 2026 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.

In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.

The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.

This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.

In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.

Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.

Important disclaimers for clients in the EU and UK

This publication has been prepared by Trading Desk Strategists within the Sales and Trading functions of Santander US Capital Markets LLC (“SanCap”), the US registered broker-dealer of Santander Corporate & Investment Banking. This communication is distributed in the EEA by Banco Santander S.A., a credit institution registered in Spain and authorised and regulated by the Bank of Spain and the CNMV. Any EEA recipient of this communication that would like to affect any transaction in any security or issuer discussed herein should do so with Banco Santander S.A. or any of its affiliates (together “Santander”). This communication has been distributed in the UK by Banco Santander, S.A.’s London branch, authorised by the Bank of Spain and subject to regulatory oversight on certain matters by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA).

The publication is intended for exclusive use for Professional Clients and Eligible Counterparties as defined by MiFID II and is not intended for use by retail customers or for any persons or entities in any jurisdictions or country where such distribution or use would be contrary to local law or regulation.

This material is not a product of Santander´s Research Team and does not constitute independent investment research. This is a marketing communication and may contain ¨investment recommendations¨ as defined by the Market Abuse Regulation 596/2014 ("MAR"). This publication has not been prepared in accordance with legal requirements designed to promote the independence of research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. The author, date and time of the production of this publication are as indicated herein.

This publication does not constitute investment advice and may not be relied upon to form an investment decision, nor should it be construed as any offer to sell or issue or invitation to purchase, acquire or subscribe for any instruments referred herein. The publication has been prepared in good faith and based on information Santander considers reliable as of the date of publication, but Santander does not guarantee or represent, express or implied, that such information is accurate or complete. All estimates, forecasts and opinions are current as at the date of this publication and are subject to change without notice. Unless otherwise indicated, Santander does not intend to update this publication. The views and commentary in this publication may not be objective or independent of the interests of the Trading and Sales functions of Santander, who may be active participants in the markets, investments or strategies referred to herein and/or may receive compensation from investment banking and non-investment banking services from entities mentioned herein. Santander may trade as principal, make a market or hold positions in instruments (or related derivatives) and/or hold financial interest in entities discussed herein. Santander may provide market commentary or trading strategies to other clients or engage in transactions which may differ from views expressed herein. Santander may have acted upon the contents of this publication prior to you having received it.

This publication is intended for the exclusive use of the recipient and must not be reproduced, redistributed or transmitted, in whole or in part, without Santander’s consent. The recipient agrees to keep confidential at all times information contained herein.

The Library

Search Articles