Federal Reserve Chair Kevin Warsh struck a cautious tone at his first policy meeting on Wednesday, as policymakers voted to hold interest rates steady for now even as a growing number signaled they will likely need to raise rates in the future.
In the Fed statement, officials acknowledged that inflation remains elevated and reaffirmed their commitment to price stability — keeping price growth low and steady over time.
They emphasized their goal of returning inflation to 2%, far below the current 4.2% figure, near the highest level in three years.
New projections for what will happen to rates in the future showed a split across the committee. Nine officials see at least one quarter-point rate increase this year, with six expecting two. Another nine see no change or a possible cut.
Notably, only 18 of 19 policymakers submitted rate projections for 2026. Warsh, who has been critical about offering such guidance, confirmed he declined to submit a rate projection.
Weighing all the factors
“The forward guidance is not well suited to the current policy at this juncture,” Warsh said.
The Federal Open Market Committee voted unanimously to hold the benchmark rate at 3.5% to 3.75%. It marked the fourth straight meeting without a change, as officials weighed persistent inflation, a softening labor market and the fallout from the war in Iran.
Earlier this year, inflation showed signs of cooling as tariff effects faded. However, the picture looks very different now.
Instead of easing price pressures, the artificial intelligence buildout is straining supplies of chips, power and data-center materials, turning what was expected to cool prices into something far warmer. Surging tech shares have compounded the effect, leaving investors wealthier and more willing to spend.
At the same time, the conflict initiated with Iran increased gasoline and commodity costs. A deal to reopen the Strait of Hormuz may bring relief, but only gradually, and the economy taking shape now looks different from the one that came before.
Fed officials are already reflecting that shift, describing growth as “solid” while pointing to strong productivity gains and capital investment.
Those trends are central to Warsh’s outlook. He has argued that advances in artificial intelligence could boost productivity, ease inflation pressures and give the Fed more room to cut rates.
Warsh said the committee discussed those dynamics at the meeting. While he didn’t offer specifics on where the conversation landed, he said he takes concerns around AI-driven disruption “very seriously.”
Inflation squeezes property deals
For markets, a concern remains inflation and its growing impact on real estate.
May’s Producer Price Index showed wholesale prices rising 1.1% for the second consecutive month, pushing annual growth to 6.5% — the fastest pace since late 2022.
For commercial real estate, the signal is clear: The recent pickup in costs isn’t a just one-off. After easing in 2023 and stabilizing through 2024, construction costs have begun to accelerate.
That’s making deals harder to pull off. Higher input costs are pushing up the rents developers need, widening funding gaps and squeezing margins. For owners, rising replacement costs are also feeding into capital spending, maintenance and insurance.
“There’s a lot of upward pressure on expense items … which puts a squeeze on margins,” said Xander Snyder, a senior commercial real estate economist at First American Financial.
That impact is already showing up in lending activity. Loan demand has softened across several property types in recent months, a sharp turn from earlier in the year when borrowers were gearing up for lower rates.
Banks, for their part, remain open to doing deals but borrowers are pulling back, with more activity centered on refinancing and selective acquisitions rather than new development.
Commercial real estate is “less sensitive to one 25-basis-point move than to the path of rates,” said Andrew Koller, a research analyst at Wolf Commercial Real Estate, a regional real-estate firm, pointing to concerns around financing conditions and long-term borrowing costs.
In flux
Geopolitical uncertainty is adding another layer of caution. “We continue to be in flux … many [are] sitting on the sidelines until we have some clarity,” said Michael Wetnight, a commercial mortgage broker in Phoenix, referring to the conflict in Iran.
That uncertainty is shaping the expectations for interest rates.
“The more important question is arguably what happens to the 5- and 10-year Treasury yields. The 10-year is still just under 4.5%, and the yield curve remains flat,” said Snyder after the press conference.
While the Fed directly controls short-term rates, longer-term yields tend to move alongside expectations for where policy is headed. If short-term rates rise further, long-term rates could follow, keeping borrowing costs elevated across the market.
That’s not a recipe for near term relief.
The “’waiting for lower rates’ is no longer a position anyone should be taking with much confidence. If anything, there is more room for long-term rates to move up,” Snyder said.
Housing shows uneven recovery
The housing market is beginning to show tentative signs of improvement after a sluggish start to the year.
Home sales in May posted the biggest gain this year, helped by lower mortgage rates in April, when many locked in loans and a rise in inventory that gave shoppers more options, according to data from the National Association of Realtors.
Last month’s gain underscores that demand is still there when more homes hit the market and affordability improves.
Lower mortgage rates are “helping on affordability,” said Lawrence Yun, chief economist at the National Association of Realtors, adding that rising incomes also contributed to more home sales.
Mortgage rates last week stood around 6.5%, edging lower in recent days but still moving with swings in energy prices and global uncertainty.
That’s because the Fed doesn’t directly set mortgage rates. Instead, borrowing costs for homebuyers tend to follow longer-term Treasury yields, particularly the 10-year, which has hovered around 4.5%. Those yields reflect investors’ expectations for inflation and economic growth — both of which have been shaped by rising energy costs and geopolitical risks.
If short-term rates rise further, long-term yields could follow higher, keeping borrowing costs elevated.
That means "buyers and sellers and builders are going to need to be comfortable dealing with 'higher-for-longer' mortgage rates," Brad Case, chief residential economist for Homes.com, said in a statement.
An uneven job market and economic uncertainty are keeping buyers cautious, likely limiting any recovery as seasonal patterns and still‑high borrowing costs weigh on demand.
Warsh echoed that restraint, explaining he sees some “restrictiveness” of Fed policy in the housing market. “It’s hard to use those same words anywhere else.”
Regime change
Warsh announced five new task forces aimed at reshaping key areas of the Fed’s approach to monetary policy.
The groups will bring in subject-matter experts to “ask hard questions,” examine current practices and consider alternatives, he said, adding that more changes are on the way.
One task force will focus on communications, reviewing the Fed’s public messaging, including its quarterly projections, the dot plot, press conferences, transcripts and meeting minutes.
Warsh has long criticized the Fed’s reliance on forward guidance, including the dot plot — a stance reflected in Wednesday’s statement.
He described the latest Federal Open Market Committee statement as “just the facts,” noting it offered no forward guidance, which officials agreed was not well suited to current conditions.
The statement was also shorter than recent releases, a shift that could signal broader changes in how the Fed communicates under Warsh.