Kevin Warsh's First Fed Meeting: Focus on Communication, Not Rate Cuts
In brief
- Warsh's Fed meeting concludes Wednesday; rates expected unchanged at 3.50%-3.75%
- Bank of America forecasts hawkish tone reflecting stronger economic data and persistent inflation
- Warsh may skip submitting projections, having long criticized Fed forecasts as unreliable
For years, Warsh has argued that the Fed has become too reliant on forecasts, speeches and forward guidance. His criticism isn't theoretical. Warsh stated that if you're not very good at something, you should do less of it, referring specifically to Fed projections. He characterized Fed forecasts as abysmal and said his own dots wouldn't be perfect either.
This philosophy could reshape Wednesday's announcement. Bank of America said there is a chance Warsh declines to submit his own projections to the Fed's Summary of Economic Projections. The SEP's dot plot, which shows where policymakers expect interest rates to move, has become one of the most closely watched pieces of Fed communication. Skipping it would signal a dramatic shift in how the central bank operates.
Hawkish Messaging Expected
Bank of America expects Warsh and the Fed to adopt a more hawkish tone, reflecting stronger-than-expected economic data and persistent inflation pressures. The bank forecasts that policymakers will remove language suggesting a bias toward future rate cuts.
Bank of America expects this week's projections to show rates remaining unchanged through 2026 before modest cuts in 2027 and 2028. Still, the tone matters more than the numbers. Bank of America also expects policymakers to acknowledge rising inflation risks while signaling a lower willingness to look through price shocks than in recent years.
The Press Conference Question
Warsh's first press conference as chair is likely to attract the most scrutiny. Bank of America expects him to strike a patient tone, arguing that recent inflation pressures linked to geopolitical events may prove temporary.
Markets remain divided over whether Warsh will ultimately prove more dovish or hawkish than his predecessor, Jerome Powell. The uncertainty has rippled into crypto markets. Bitcoin is down about 25% year-to-date since Warsh took office on May 22nd. In May, combined exchange volumes fell 3.45% to $4.41 trillion, the lowest since September 2024. One bright spot: RWA perpetual futures volumes rose 10.4% in May, hitting a new all-time high.
