The end of forward guidance?

Dave Harrison Smith, CFA
Chief Investment Officer
June 23, 2026

For economists, last week was the monetary policy equivalent of a presidential election. For the first time since 2018, a new voice took the helm of the U.S. Federal Reserve (the “Fed”). Kevin Warsh, former Fed governor and, more recently, a lecturer at Stanford Graduate School of Business, officially succeeded Jerome Powell as chair of the Federal Reserve. Warsh wasted little time signaling that some aspects of Fed policymaking may look different under his leadership.

The most immediate changes were in communication. The Federal Open Market Committee’s (FOMC) policy statement, released following the central bank’s meeting, was significantly more concise and removed much of the familiar forward-guidance language. Warsh’s objectives appear more philosophical than stylistic. He has argued that markets can become overly dependent on Federal Reserve guidance, reducing their usefulness as an independent signal of underlying economic conditions. In Warsh’s view, markets function best when they respond to economic data rather than simply reflecting the Fed’s own expectations back to policymakers.

While the statement itself was brief, its closing sentence stood out unambiguously: “The Committee will deliver price stability.” Combined with Warsh’s press conference and the FOMC’s updated projections, markets interpreted the message as a meaningful hawkish policy shift. While the Fed maintained its target range at 3.50% to 3.75%, expectations for additional tightening rose sharply. As of this writing, two or more rate hikes are viewed as the most likely outcome for the remainder of 2026. This marks a dramatic reversal from the start of the year, when investors were confident that the Fed would deliver at least two quarter-point rate cuts.

Fed Funds futures: Expected rate changes through year-end 2026

Globally, monetary policy is also tilting toward tighter policy. In June, both the Bank of Japan (BOJ) and the European Central Bank (ECB) raised policy rates by 25 basis points. Investors widely interpreted statements from the BOJ as implying additional rate increases later this year, while recent commentary from ECB policymakers suggested another increase could come as soon as July. Officials from both institutions cited upside inflation pressures as a primary catalyst for further tightening.

Major Central Bank policy rates

The conflict in the Middle East has complicated the policy outlook. Higher energy prices are pushing headline inflation higher and are beginning to filter into other areas of the economy, increasing the risk of second-order inflation effects. We are also seeing a rise in longer-term inflation expectations, a psychological dynamic that can prove difficult to reverse once it becomes embedded. Central banks are increasingly focused on preventing elevated energy prices from altering consumer and business behavior in ways that could sustain above-target inflation for an extended period.

Markets are now pricing in a meaningfully tighter monetary policy backdrop than at the start of the year, and the cushion of lower interest rates many investors expected has largely disappeared. This has important implications for both security selection and asset allocation. We continue to view inflation as one of the most significant risks facing investors today. The backdrop is not necessarily bearish, but it is less forgiving. In our view, inflation expectations remain one of the most important indicators to watch in the months ahead.

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