The Fed expects interest rates to remain stable as inflation is at its highest level since 2023

The Federal Reserve is expected to hold rates steady after its monetary policy meeting this week amid rising inflation, while recently ousted chairman Kevin Warsh holds his first post-meeting press conference.

Inflation had risen even before the Iran war pushed up energy prices, which in turn has contributed to key inflation measures moving further away from the Fed’s 2 percent target. The Consumer Price Index (CPI) rose to 4.2 percent in May, the highest level since April 2023.

This inflationary trend has led markets to rule out a rate cut at this week’s meeting of the Federal Open Market Committee (FOMC), the panel responsible for monetary policy decisions.

Warsh’s debut at the FOMC’s post-announcement press conference will be closely watched for signs of how policymakers see the future of the economy and monetary policy, with prospects for potential rate cuts this year looking dim.

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The CME FedWatch tool shows a 98.4 percent chance the Fed will leave the benchmark federal funds rate unchanged in its current target range of 3.5 percent to 3.75 percent this week. It also shows a 42.7 percent chance that rates will remain at this level through the December meeting, narrowly ahead of a 25 basis point cut at that time.

« Although Warsh is widely regarded as a douchebag, he inherits a committee that has become significantly more hawkish, » said Gregory Daco, EY-Parthenon’s chief economist. « Several policymakers have recently argued that rate hikes should remain an option if inflation remains above target, and energy-driven inflation the pressures have only reinforced this delusion. »

JPMorgan economists led by Michael Feroli wrote that they think the inflation background and laboratory market On a stronger note, the FOMC « should abandon the easing bias in its post-meeting statement and replace it with either a neutral phrase or no forward guidance at all. »

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Fed watchers will also be looking for signals of possible institutional changes at the central bank in terms of its communications and forecasts.

Daco said that summary of financial forecasts The Fed’s (SEP, or « scatter plot ») release is likely to garner more attention than usual because « Warsh has repeatedly expressed skepticism about the usefulness of economic forecasts and the dot plot of median interest rate expectations. »

« While we still expect the SEP and dot plot to be released in June, we would not be surprised if Warsh refused to present his own forecasts. Such a decision would be largely symbolic, but would reinforce his broader view that policymakers should pay less attention to forecasts and more weight to incoming economic data, » Daco added.

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Goldman Sachs Economists led by Jan Hatzius and David Mericle noted questions about the SEP’s release and said they don’t expect major changes in the near future.

« The FOMC just took a long look at its communications practices last year in its framework review and was unable to agree on any changes, » they wrote.

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Economists at JPMorgan said that while Warsh has promised « systemic change » at the Fed and is likely to face questions about it, he has also « always been somewhat vague about it, and at this early stage we expect him to say he has initiated a review but avoid giving specifics. »