Fed Potentially Removes Easing Bias
The Federal Reserve is expected to keep interest rates unchanged on Wednesday in its first meeting chaired by Kevin Warsh. However, market focus will not be solely on the rate decision, but rather on changes in policy language and economic projections that could indicate the Fed's growing concerns about inflation stemming from the Iran war.
Recent data still shows a relatively strong US labor market, with the unemployment rate at 4.3%, while inflation remains well above the central bank's 2% target. This has led many analysts to predict the Fed may remove the phrase "additional adjustments" from its policy statement, which was previously understood to signal a potential future rate cut.
Warsh has long been known to be averse to overly explicit forward guidance. With inflation still high and energy risks not yet fully resolved, the Fed could potentially shift to more neutral language to maintain room to consider a rate hike if needed. The market currently expects the FOMC to raise rates by 25 basis points in December.
Michael Feroli, chief US economist at JPMorgan, expects the Fed to move toward a more neutral bias. He believes the committee under Warsh could even trim the interest rate guidance from the policy statement, both at this meeting and in future periods. This change could also help unify the views of Fed officials who previously favored more hawkish language.
The Fed's latest interest rate decision, policy statement, and projections will be released at 2:00 p.m. ET, followed by Warsh's press conference half an hour later. Jerome Powell remains a voting member of the FOMC in his position as Fed governor, even though he is no longer chairman.
This meeting also represents an early test of Warsh's leadership style. During his Senate confirmation process, he stated that Fed officials talk too much but don't necessarily add to the quality of policy discussions. This statement signaled that the Fed's communications under Warsh could become more concise and rely less on explicit guidance.
Political pressure also overshadowed Warsh's early tenure. He took over after relations between Powell and the White House deteriorated due to Powell's resistance to President Donald Trump's push for a significant interest rate cut. At the same time, a Supreme Court decision regarding the position of Fed Governor Lisa Cook still has the potential to influence the future governance of the central bank.
From an economic perspective, the room for interest rate cuts appears increasingly narrow. The latest quarterly projections are expected to show that the median Fed official no longer sees a rate cut this year, but instead maintains the current range of 3.50% to 3.75%. Some officials may even include projections for a rate hike.
Geopolitical developments are a key factor in this decision. The agreement toward ending the war with Iran and the planned reopening of the Strait of Hormuz have pushed oil prices closer to pre-conflict levels, but the Fed must still assess how much of the previous energy surge will translate into goods and services inflation in the coming months.
Goldman Sachs' David Mericle believes the inflation impact so far is more like the normal transmission of a major oil boom and not enough to force Warren Buffett to raise rates immediately. However, the chance of a rate cut could still be delayed until at least the middle of next year, especially if headline inflation rises above 4% in the coming months and remains above 3% throughout 2026.
For markets, the key implications lie in the path of inflation, yields, the US dollar, and risk asset valuations. If the Fed removes its easing bias without signaling an aggressive hike, the market could read the policy as neutral-hawkish. The next focus will be on the dot plot, the tone of Warsh's press conference, the latest inflation projections, and the Fed's assessment of the impact on energy prices following the US-Iran deal.
Source: Newsmaker.id
