Welcome to Fed day
While the US and Iran looks to try and finalise the text and terms of their framework agreement for a ceasefire, markets will have to divert their attention at least for a day. The Fed game is back in town and that will keep things interesting, especially with the latest developments in the Middle East.
No change to the Fed funds rate is expected and the central bank is not expected to signal a material change in monetary policy stance.
However, this will be Kevin Warsh’s first meeting as Fed chair. So, all eyes will be on his views and how he wants to lay out his agenda in pushing for a Fed “reform" in the name of the Trump administration.
It is expected that he will take on a more dovish view on inflation. But if you’re expecting him to be explicit in linking that to future policy decisions, then you might end up being disappointed today. It is not likely that the Fed or Warsh himself will offer up any explicit forward guidance despite the angled approach he will be taking.
As such, the rate decision and statement may not offer much of anything at all today. It will all be on Warsh’s press conference instead.
With the overall balance of the Fed arguably leaning slightly more hawkish amid US-Iran developments, Warsh will likely want to tip the scales back to the other side in setting the tone for his tenure.
He will likely brush off the energy price shock as transitory, as he will with any lingering questions about tariffs inflation. And at the same time, it will be easy for him to keep arguing the point that AI will ultimately be disinflationary to the economy as well.
So, he has quite a few avenues to work with in making his case.
While very much expected, markets could still lean into his comments with more caution. That especially as traders are taking on the view that the Fed’s next move is most likely a rate hike. By year-end, traders are pricing in ~20 bps of rate hikes currently.
As such, there is room to pull back on that despite the fact that headline inflation has hit 4%. But given the figure, it would be quite careless for Warsh to oversell his agenda today. That especially as things could look to get worse before they get better on the inflation front.
And what more with the labour market also continuing to keep firmer, as we saw with the hot US jobs report earlier this month here.
This article was written by Justin Low at investinglive.com.