Fed preview: Warsh is the noise, the Board is the signal
The FOMC is widely expected to keep the federal funds rate unchanged at 3.50-3.75% and remove the easing bias from the statement in an unanimous decision. At this meeting we will also get the Summary of Economic projections (SEP) where near-term inflation is expected to be revised higher while unemployment lower. The median dot plot is expected to show no cuts for this year with more hawks than doves.
Fed Chair Warsh is expected to refrain from giving out too much giving his disdain for forward guidance but might acknowledge the diplomatic breakthrough in US-Iran negotiations and the quick drop in oil prices as favoring the case to look through the recent energy price spike.
STATEMENT
The first paragraph of the statement will likely reaffirm that economic activity has been expanding at a solid pace and might note that job gains have been strong. "Inflation is elevated" will likely remain unchanged.
In the second paragraph, we might see a change to "the committee is attentive to the risks to both sides of its dual mandate" into something that acknowledges that upside risks to inflation have risen.
The third paragraph is where we will see the biggest change as the easing bias is widely expected to be removed. The part saying "in considering the extent and timing of additional adjustments to the target range" will be gone.
Finally, the decision is expected to be unanimous, so we shouldn't see any dissenter in the last paragraph.
Potential Surprises:
- Easing bias remains (very dovish)
- Tightening bias is added (very hawkish)
*these are very unlikely
SUMMARY OF ECONOMIC PROJECTIONS AND DOT PLOT
The Summary of Economic Projections (SEP) is expected to show a significant upside revision to near-term inflation and a more slightly one for 2027. Growth is expected to be revised a bit lower for 2026 but no significant changes beyond. The unemployment rate is likely to remain unchanged or revised slightly lower. The macroeconomic projections won't be the focus of this decision.
I think the dot plot is what the market will care about the most as it's going to show where the board leans. Keep in mind that Warsh is still seen as a Trump lackey who's been appointed for the sole purpose to lower interest rates. And he did support rate cuts in his previous public remarks.
In my opinion, Warsh is going to be the noise (at least until markets get to know him better and he proves to be independent), while the Board is going to be the signal. Monetary policy is decided on a majority basis and it's not a coincidence that Fed's Powell chose to stay on the board until 2028. Even Fed's Waller, who's been a leading indicator for the direction of Fed policy and who's been advocating for rate cuts in 2025, shifted to a neutral stance recently.
Now, the dot plot is widely expected to show no cuts in 2026. More importantly, the 2027 dot should also indicate no rate cuts. If it still shows one cut, it would implicitly maintain the easing bias. Overall, the distribution of the dot plot is expected to be more hawkish than the last one.
One caveat is that we might see 18 rather than 19 dots as Warsh could abstain from submitting his own projection in line with his no-forward guidance mantra. If he does though and we see a member more dovish than the rest of the committee, then we will know that he's the one supporting more rate cuts.
Potential Surprises:
- 2026 dot shows 1 rate cut (very dovish)
- 2026 dot shows 1 rate hike (hawkish)
- 2027 dot shows 1 rate cut (dovish)
- 2027 dot shows 1 or more rate hikes (hawkish)
PRESS CONFERENCE
This is going to be Kevin Warsh's first press conference as the Chair of the Federal Reserve. Warsh has been critical of forward guidance so we might not get much in terms of hints/signals about the future path of monetary policy. Nobody really knows how he's going to deliver his first press conference. He might acknowledge though the diplomatic breakthrough in US-Iran negotiations and the quick drop in oil prices as favoring the case to look through the recent energy price spike. He might also note that long-term inflation expectations remain anchored.
MARKET PRICING
- 2026: 20 bps of tightening by year-end (58% probability of rate hike in December)
- 2027: 25 bps of tightening by September (100% probability of a rate hike by September 2027)
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