Warsh-led Fed may hold rates steady, tightening to persist amid inflation: Analysts

Analysts surveyed by Argaam said that the Fed remains committed to its cautious, data-dependent approach, reinforcing the scenario of leaving rates unchanged at the current meeting while closely watching the tone and messages Warsh will deliver.

A rate hold is the most likely scenario, but without a dovish signal

Ryan Lemand, Co-Founder and CEO of NeoVision Wealth Management, expects the Federal Reserve to keep rates steady at its current meeting, ruling out the possibility that Warsh would push for a rate hike at his first meeting as central bank chief.

Ryan Lemand, Co-Founder and CEO of NeoVision Wealth Management

The previous meeting witnessed a sharp division within the Federal Reserve regarding the path of monetary policy, said the analyst, expecting those differences in opinion to persist, especially given the presence of members who support the US administration’s calls for lower rates.

He further noted that the strength of the labor market and elevated inflation make even the calls for rate cuts less prominent than in previous months, given the lack of sufficient justification for monetary easing at the present time.

For his part, Ahmed Azzam, Head of Research at Equiti Group, expects the Fed to keep rates unchanged within the 3.5%–3.75% range, stressing that a hold decision should not necessarily be interpreted as a dovish signal.

Ahmed Azzam, Head of Research at Equiti Group

He explained that the recent jump in inflation to 4.2% was largely the result of an energy shock associated with the Middle East conflict rather than a broad-based acceleration across inflation components.

Inflation reaching these levels prompted markets to reassess the probability of a rate hike by year-end. However, the details of the data show that energy and gasoline were the main drivers of the increase, making the Fed more cautious before implementing another rate hike, particularly amid optimism surrounding a peace agreement and the decline in oil prices to below $80 per barrel, according to Azzam.

He added that it would be illogical for the Fed to raise rates in response to an energy shock that may already be on its way to fading, especially since monetary policy operates with a time lag, whereas energy prices can change much more rapidly.

However, Azzam stressed that this does not mean the Fed can afford to appear comfortable or dovish, given the continued strength of the labor market and economic growth, as well as core inflation remaining above the 2% target.

Inflation and energy keep tightening on the table

According to Lemand, keeping rates unchanged at the current meeting does not mean the end of the monetary tightening cycle. He expects the Fed to be forced to raise rates before the end of 2026 if current inflationary pressures persist, similar to actions taken by some major central banks in confronting inflation.

“The current energy shock is likely to feed into inflation over the coming months. Moreover, oil prices are expected to stabilize between $75 and $80 per barrel—levels that remain relatively high and are likely to sustain price pressures while limiting the chances of rate cuts,” he continued.

For his part, Azzam said that markets have correctly priced in the interest-rate decision itself, given the near-certain expectation that rates will remain unchanged at the current meeting.

A potential surprise will not come from the rate decision but from how the Fed interprets the recent rise in inflation, and whether it views it as a temporary shock linked to higher energy prices that could fade, or as a risk capable of reshaping inflation expectations and requiring a more hawkish stance, he added.

Azzam also explained that the Fed will attempt to strike a balance between not overreacting to an oil shock that could ease as geopolitical conditions improve, and not allowing markets to quickly assume that rate cuts are imminent.

He noted that the peace agreement may reduce the likelihood of near-term rate hikes, but it does not automatically revive the scenario of rate cuts, making the wording of the statement and the press conference more important than the decision itself.

Warsh likely to adopt conditional neutrality, avoiding political bias

Warsh will be keen at his first meeting to emphasize the Federal Reserve’s independence and avoid displaying any political bias, said Lemand, noting that his position as central bank chief requires adherence to the principle of monetary-policy independence.

He expects the Fed chairman to reaffirm his commitment to bringing inflation back to target levels, highlighting that discussing rate cuts while inflation remains elevated and oil prices hover around $80 per barrel would not appear logical. Consequently, his message is likely to focus more on fighting inflation than on potential monetary easing.

For his part, Azzam expects Warsh to adjust the policy statement’s tone from an “easing bias” toward a position closer to conditional neutrality. “It will not be in the new chairman’s interest to begin his first meeting with an overly hawkish message given falling oil prices and the possibility of easing energy risks, but at the same time he cannot maintain language implying that rate cuts are the natural next step while inflation has returned to levels above 4%,” he said.

Additionally, the most logical formulation would be to stress that current monetary policy remains sufficiently restrictive for now, while emphasizing the need for more evidence on inflation before considering any adjustment to rates, while retaining readiness to act should inflation expectations become less anchored, Azzam added.

According to him, this approach leaves the door open to multiple scenarios while effectively limiting market bets on rapid rate cuts in the near future.

Azzam also noted that maintaining balance in communication will be essential for preserving the Fed’s credibility and independence in confronting inflation, without creating the impression that monetary policy is influenced by political pressure.

He opined that the reactions coming from the US administration following the decision will be closely monitored by markets to assess the degree of alignment or divergence with the Federal Reserve’s new direction.

“Warsh, who has previously called during congressional hearings for reducing the Federal Reserve’s verbal communication, may adopt a more concise and straightforward style in his first press conference, while showing greater reluctance to provide detailed forward guidance,” Azzam said.

Regarding the impact of these messages on markets, Azzam said that emphasizing the fading of the energy shock could reduce expectations of future rate hikes and support equity and gold markets. On the other hand, stressing the need for several additional inflation readings before considering any rate cuts could keep bond yields relatively stable and maintain the strength of the US dollar.

He added that the peace agreement gives Warsh room to avoid appearing excessively hawkish, but at the same time it does not provide him with a justification for returning to a clearly dovish tone.

Balance sheet could become a tightening tool

Azzam suggested that Warsh may send indirect hawkish signals through the balance-sheet channel by hinting at the possibility of accelerating the pace of reducing bond holdings if financial conditions allow.

“This could serve as an alternative tightening tool without directly raising rates, especially since Warsh has historically criticized quantitative easing policies and resigned from the Federal Reserve in 2011 during the tenure of Ben Bernanke in opposition to those policies,” he stated.

Azzam further said that the probability of using this tool remains moderate, but it is one of the messages Warsh could send to markets in the first real test of his monetary-policy approach.

Bond market more indicative than equities; gold sees continued demand from central banks

Markets have already priced in a rate hold. The more important move after the meeting will be in the bond market rather than the stock market, as long-term yields more accurately reflect investor expectations regarding the path of monetary policy, said Lemand.

He added that recent movements in long-term bonds suggest investors have not ruled out the possibility of future rate hikes, despite expectations that rates will remain unchanged at the current meeting.

The analyst also pointed out that the performance of the US stock market does not fully reflect the state of the US economy due to the significant support coming from technology stocks and major IPOs, arguing that the bond market provides more accurate signals regarding growth, inflation, and monetary policy expectations.

Regarding gold, Lemand said that purchases by central banks—particularly those in the BRICS countries—have been the main driver behind price gains in recent periods. He highlighted the continued purchases of gold by the People's Bank of China as part of a broader effort by several countries to diversify reserves away from the US dollar.

“Gold may remain under pressure in the short term if geopolitical de-escalation continues, while official demand from central banks should remain a supportive factor for prices over the longer term,” he concluded.