This week's Federal Open Market Committee meeting is only the second one with Kevin Warsh at the helm. He has repeatedly said he believes a "good family fight" will produce better policy, and today, investors may start to get clues on how that could happen.
What to expect: Market participants largely expect the Federal Reserve to maintain its benchmark interest rate at 3.50%-3.75% this afternoon. But the odds of a hike were about 32% at the time of publishing, up from 25.7% a week ago, according to the CME FedWatch tool. "In our view, the majority of the committee is likely to look at recent data and conclude that the U.S. economy is
probably not overheating and that rates are 'in a good place,'" said Citi Economist Andrew Hollenhorst. Specifically, he pointed to a cooler-than-expected flat core CPI in June, implying just 0.18% M/M core PCE. "It would be hard to explain declining to hike in June but then hiking in July after both inflation and jobs data were softer," Hollenhorst said. Truflation said the Fed "is likely to keep policy rates unchanged through the remainder of 2026 unless inflation surprises materially higher or economic activity weakens significantly."
Hawkish dissent: Some observers are expecting at least
two dissents in favor of a hike in the FOMC's statement. Dallas Fed President Lorie Logan and Cleveland Fed President Beth Hammack are the most likely to dissent, according to Brown Brothers Harriman, Citi, and Wells Fargo. Minneapolis Fed President Neel Kashkari may also be leaning in that direction. And without the benefit of forward guidance, there's still a chance of an increase. Citadel Securities expects such a move that would send a strong signal that Warsh is serious about
fighting inflation. Evercore ISI's Krishna Guha said he can't put the odds of a rate hike too low, due to Warsh's refusal to set out his strategy. "We see Warsh adopting a two-stage approach – first establish credibility on inflation, then pivot to institutional reform, the balance sheet, and a forward outlook dominated by AI with the aid of his task forces," he projected.
Bigger picture: The interest rate swap market isn't pricing in any probability of a rate cut, the option that President Donald Trump has been urging. With the U.S. economy being among the world's strongest, its interest rates should be "the
lowest in the world," Trump insisted last week. Investing Group Leader Lawrence Fuller sees little chance of the FOMC hiking either on Wednesday or in September, weeks away from the midterm elections. Furthermore, he expects inflation data to support that view. "I think we have seen the
peak rates in inflation, and that disinflation will ensue between now and year-end," Fuller said. "That should be all it takes to convince a majority of Fed members, led by Chairman Warsh, to maintain current policy through year-end. Otherwise, the Fed may have more problems than a rising rate of inflation."
