The US Federal Reserve will hold its second meeting under new chairman Kevin Warsh starting on Tuesday, with markets expecting policymakers to keep interest rates steady amid concerns about inflation that could be exacerbated by US President Donald Trump’s renewed war on Iran.
Warsh was chosen to lead the US central bank by Trump, who has made clear his demand for lower interest rates after putting unprecedented pressure on the independent monetary policymaking body.
After two days of closed-door sessions, the Fed’s open market committee (FOMC) will announce its decision on Wednesday at 14:00 (1800 GMT), followed by a press conference from Warsh.
Most investors expect the Fed to hold rates steady at 3.50-3.75 percent for the fifth straight meeting, according to CME’s FedWatch monitoring tool.
US consumer inflation eased to 3.5 percent year-on-year last month, but remains well above the Fed’s long-term target of two percent, which it has missed in more than five years.
Since last week, an escalation of hostilities has seen intensified US strikes and retaliatory actions by Tehran targeting Washington’s allies across the region, while Yemen’s Houthi rebels have threatened to block the Red Sea oil trade route.
The fighting has pushed energy prices higher once again, with the benchmark oil futures contract breaching $100 a barrel for the first time since late May, when energy prices were in decline.
At the Fed, policymakers have lost patience with persistent inflation, indicating that a rate hike may be around the corner.
The Fed “must be ready to tighten monetary policy to prevent a repeat of the inflation episode from 2021 to 2022,” Fed Governor Chris Waller said last week.
“Staring at inflation until it melts before our withering gaze is not an option.”
– ‘Hawkish Core’ –
Since taking office, Warsh has pledged to reduce or eliminate the amount of forward guidance the Fed provides in its decision-making process, a move that has received mixed reactions.
The new president has said that providing forward guidance locks policymakers into positions they may need to change. However, some analysts argue that uncertainty in decision-making creates more uncertainty for markets.
In public statements since taking control of the Fed, Warsh has said he has a “firm commitment” to providing price stability, but has not provided details on how or when he thinks it would be appropriate to act.
The Fed has a dual mandate to keep inflation at its long-run target while also providing maximum employment.
Its main means of achieving this is the economy’s base interest rate – raising rates tends to limit economic activity and high prices, while lowering them encourages employment and investment, but can also fuel inflation.
The U.S. labor market has largely stabilized, with unemployment steady despite zigzagging job growth, leaving policymakers largely focused on inflation.
“The ‘firm commitment’ is, in my view, insufficient to tighten monetary policy and contain any inflationary pressures,” said Gregory Daco, chief economist at EY-Parthenon.
With Warsh remaining largely silent, some other policymakers have been vocal about their concern about high prices and the potential need for action in the near term.
“When you create a vacuum, it often happens that the vacuum gets filled,” Daco said.
With headline inflation falling in June, ahead of further increases expected in the future, analysts say they do not expect a rate hike at this meeting – but that the decision is likely to have some dissenting voices.
“We may have a new president, but the old guard is now worried about where the economy has moved since the beginning of the year,” Diane Swonk, chief economist at KPMG, told AFP.
Inflation has been under pressure not only from rising fuel prices due to the war, but also from increased demand from the AI boom and the continuing effect of Trump’s tariffs trickling through the economy.
“The Fed’s hawkish core has not only strengthened, it has broadened,” said Swonk, who expects two rate hikes later this year.
