The US Federal Reserve is expected to hold interest rates steady on Wednesday in Kevin Warsh’s first meeting at the helm of the central bank, with rate hikes potentially on the horizon to combat rising inflation.
Warsh has chaired the Fed’s two-day open market committee (FOMC) meeting this week, with a decision to be announced at 14:00 local time (1800 GMT) on Wednesday.
US inflation hit a three-year high in April. It has been fueled this year by President Donald Trump’s war on Iran, which has seen energy prices skyrocket, with knock-on effects across a range of sectors.
With the labor market strengthening, Fed policymakers noted a growing concern about inflation, and rate hikes are potentially in the offing to tame runaway prices.
Such a move would surely anger Trump, who has launched an unprecedented scare campaign to pressure the Fed to cut interest rates.
Warsh has backed interest rate cuts in the recent past, despite inflation remaining well above the Fed’s long-term target of two percent — it was 3.8 percent in April, according to the central bank’s preferred gauge.
On Wednesday, however, analysts expect Warsh to join other policymakers in letting the energy price shock wash over the world’s largest economy before making a move.
“I think he’ll be in the wait-and-see camp,” said Allianz Trade’s Dan North. “It’s very difficult to justify a cut when you already have inflation in the pipeline.”
– ‘Broken’ –
While Wednesday’s decision is all but certain to keep interest rates in a range between 3.50 and 3.75 percent, all eyes will be on the language the Fed uses in its statement.
At least four of the committee’s 12 voting members supported a change in wording to indicate that the next rate move could be as likely an increase as a decrease.
Warsh himself has called for the Fed’s guidance messages to be scrapped altogether, arguing that it locks policymakers into one position rather than allowing them to react to changing situations.
However, change at the central bank tends to be gradual, and analysts do not expect Warsh to receive a big change in his first meeting at the helm.
“It could be a more fractured environment, of course,” Greg Daco, chief economist at EY-Parthenon, told AFP.
“In this first instance, it may suggest some changes in communication and we may be in the early stages of a move towards more discretionary decisions when it comes to monetary policy.”
Wednesday’s announcement will also see the release of the Fed’s quarterly summary of economic projections, which includes policymakers’ expectations for inflation, growth and the interest rate path.
As part of his “reform-oriented” agenda, Warsh has called on the Fed to drop its “full point,” an anonymous projection of where Fed officials expect rates to go.
On Wednesday, the new Fed chairman is expected to stick to his point, but analysts say he is unlikely to drop the entire exercise immediately.
– ‘It doesn’t help his case’ –
Pao-Lin Tien, an economics professor at George Washington University, told AFP that the move to more opaque monetary policymaking could mean inflation expectations are less anchored.
“I think our fear would be that without future guidance, inflation expectations could become a little more volatile,” she said.
As for Trump, any move away from a rate cut is likely to anger the Republican, who wants to see the Fed lower borrowing costs to boost economic activity — despite already high inflation.
“President Trump is not helping his case by making these requests so openly, it makes it harder for whoever he nominates to do so,” Tien said.
“He’s doing the opposite of what he needs to do to make sure rates go down,” she added, referring to the war against Iran.
