Vosh's first appearance in office: No interest rate cuts, no rate hikes, but ready to "say less"?

Article: Bu Shuqing

Source: Wall Street Insights

Kevin Warsh's first monetary policy meeting as Federal Reserve Chair has attracted much attention, but market expectations for his initial actions are very limited.

In the early hours of Thursday Beijing time, the Federal Reserve will announce the latest interest rate decision. According to CNBC Fed Survey, 32 economists, fund managers, and strategists generally believe that the Fed will not adjust interest rates at this meeting or any meeting before 2027.

Meanwhile, 88% of respondents expect the Fed to remove the phrase "dovish bias" from this week's statement—this wording has previously implied that the next move would be a rate cut. This shift in expectations means that the market's bets on rate cuts have officially exited the near-term horizon.

High inflation remains the core reason for holding interest rates steady. Respondents pointed out that tariffs under the Trump administration and U.S.-Iran conflicts have driven up inflation, leaving little room for rate cuts. At the same time, although Warsh is generally viewed as dovish, he is taking over a committee that has a clearly hawkish stance, with some officials openly stating that if inflation remains above target, rate hikes should remain an option.

Interest rate expectations: No rate cuts in sight, rate hikes unlikely as baseline scenario

Survey results show that respondents' forecasts for the federal funds rate remain around the current 3.62% level until 2027. Although high oil prices pose inflationary pressure, respondents do not believe this will trigger rate hikes.

Gregory Daco, Chief Economist at EY, said: "Although Warsh is generally seen as dovish, he will take over a committee that has a clearly hawkish stance. Several policymakers have recently advocated that if inflation remains above target, rate hikes should be kept on the table, and energy-driven inflation pressures will only reinforce this tendency."

Warsh himself has previously stated that rates could be lower, but given recent rebounds in inflation and strong employment data, he has not explicitly stated whether he has adjusted his outlook. After the survey was completed, news of a potential U.S.-Iran agreement surfaced, which might give Warsh room to cut rates earlier than expected, but this remains uncertain.

Brean Capital Chief Economist John Ryding takes a more hawkish stance, stating: "The Federal Open Market Committee should raise interest rates to curb rising inflation expectations and bring policy closer to neutral." Janney Montgomery Scott Chief Fixed Income Strategist Guy LeBas also pointed out that the vulnerability of the short-term labor market has passed, and the Fed's dual mandate is now clearly tilted toward inflation.

Economic resilience: Recession probability declines, growth outlook raised

Despite the tight interest rate outlook, improvements in economic fundamentals provide Warsh with a relatively favorable environment for his appointment.

Respondents raised their 2026 U.S. GDP growth forecast to 2.2%, up 0.25 percentage points from the last survey; the 2027 forecast is 2.3%, both recovering most of the downward revisions caused by U.S.-Iran tensions. The recession probability has fallen from 33% in April to 25%, and unemployment rate expectations for the next two years remain around the current 4.3%.

Economist Hugh Johnson wrote: "Improved economic and employment conditions, along with moderate stock price gains, are common features of the current stock-market-economy-interest rate cycle phase. Early warning signs of a bull-market-ending recession have not yet appeared."

Several respondents believe that a healthy job market means the Fed should focus on inflation targets—which have not been achieved for most of the past six years.

Communication reform: Market favors "less talk," but press conference remains uncertain

Beyond monetary policy, respondents widely agree with Warsh's push for reforming the Fed's communication approach.

The survey shows that 59% of respondents believe Fed officials speak too much, while only 38% think their communication is appropriate, aligning closely with Warsh's stance advocating reduced public statements. However, 59% expect Warsh to hold a press conference after each meeting—this contrasts with his refusal to make commitments during his Senate confirmation hearing in April.

On the "dot plot" issue, 53% of respondents believe this tool should be completely eliminated. Various reform proposals, including releasing the dot plot several days after meetings or linking the dots to officials' specific economic forecasts, have been rejected by most respondents.

Risk landscape: AI bubble and inflation ranked as top threats

The survey lists inflation as the primary growth risk, followed by the burst of the AI bubble. 84% of respondents believe AI stock valuations are too high, down 6 percentage points from December last year, with an average overvaluation of about 21%. Additionally, 69% think the overall stock market is overvalued, but this is the lowest level in nearly a year.

Drew Matus, Chief Market Strategist at MetLife Investment Management, warned: "The gap between AI's reality and expectations is a risk for the stock market and consumers relying on stock wealth effects. Wealth effects are likely to become a transmission channel for the next economic downturn."

Respondents' overall outlook on the stock market is cautious, expecting the S&P 500 to approach 8,000 points by 2027, roughly a 5.5% increase from current levels.

In contrast, concerns about credit market risks have eased. Only 53% of respondents believe systemic risks in the credit market have "risen," down from 75% in March this year, with 3% believing risks have "risen significantly."

John Donaldson, Fixed Income Director at Haverford Trust Co., said: "Despite some pessimistic forecasts, we do not see widespread threats in the credit markets. Any weakness is limited to CCC and CC-rated credits, and credit spreads in the financial sector show no signs of stress."