The Federal Open Market Committee (FOMC) will make its interest rate decision on 17 Jun under its new chair, Kevin Warsh. He takes over at a difficult moment: inflation is rising, expectations are elevated, and he must balance the Fed’s institutional independence with the expectations of the president who nominated him.
Since the last meeting, inflation has worsened. The May CPI print showed headline inflation reaching 4.2% year-on-year, with the energy sub-index accounting for 60% of the monthly increase in the all-items index.
Inflation expectations have also picked up. According to the University of Michigan’s Surveys of Consumers, year-ahead inflation expectations stood at 4.6% in June, down slightly from 4.8% in May but still well above the 3.4% reading recorded before the outbreak of war in the Middle East.
The labour market, by contrast, has held up well. After showing signs of weakness last year, it has regained ground, supported in part by the administration’s restrictive immigration policies. More broadly, the economy has remained resilient, helped by continued large government deficit spending.
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Internal struggle
Warsh must also manage internal dynamics within the committee. His task is to steer the FOMC toward the policy path he considers most appropriate while finding consensus among members who may not share his priorities. Securing votes in line with the chair’s preference will be difficult in the current environment.
The recent inflation spike has strengthened the position of the committee’s hawkish members. At the last meeting, three members – Beth Hammack, Neel Kashkari and Lorie Logan – dissented over the inclusion of a so-called "easing bias" in the policy statement. The relevant section reads, "In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook and the balance of risks." As inflation has risen further, the removal of this easing bias now appears likely.
Communication challenge
Warsh has expressed concern that committee members communicate too frequently without delivering much substance. "If you ask me my true personal opinion right now, Fed chairs and other central bankers around the FOMC, they speak quite frequently," he said during his confirmation hearing.
Alongside the rate decision and statement, the Fed will release its latest economic projections, including the dot plot. Warsh has previously dismissed the dot plot as an effective communication tool. This will make his post-meeting press conference especially important. What the new chair says – and how much he says – will carry as much weight as the decision itself.
Warsh will likely face questions on his plans to reduce the balance sheet and on how the Fed’s stance compares with the European Central Bank, which raised rates despite facing a less severe inflationary environment.
Market pricing suggests the odds of a rate cut by the end of the year remain extremely slim. Futures markets currently imply a 44.6% chance that rates will stay in the 3.50–3.75% range and a 41.2% chance of a 25 basis point hike. The probability of the benchmark rate reaching the 4.00–4.25% range by the 9 Dec meeting stands at just 12.2%.
The FOMC decision will be released at 14:00 local time (18:00UTC), followed by Warsh’s press conference at 18:30.
Other central banks
Other central banks have already begun tightening policy. The ECB and the Bank of Japan have raised their benchmark rates to 2.25% and 1.0% respectively. The Bank of England is expected to hold rates steady, given lower-than-expected inflation and signs of a cooling economy. Warsh will likely be asked how the Fed intends to navigate a different path.
