The US central bank holds its second meeting presided over by Kevin Warsh. Most investors expect rates to remain unchanged, but pressure from hawks for a hike due to persistent inflation is growing.
The Federal Reserve of the United States (Fed) is holding its second monetary policy meeting on Tuesday and Wednesday under the presidency of Kevin Warsh, appointed by Donald Trump with the expectation of lowering credit costs. However, the economic context complicates that goal.
Reference interest rates are set in a range between 3.50% and 3.75%, a level that has remained unchanged since December. According to the CME FedWatch tool, most investors anticipate a fifth consecutive hold.
However, market confidence is lower than usual: more than a third of traders consider a new hike possible. The reason is the rise in inflation, driven by the war in the Middle East and the increase in oil prices, which has changed the course of expectations.
The Fed has not raised its rates since mid-2023. However, the PCE price index, the central bank's preferred indicator, rose by 4.1% year-on-year in May, more than double the 2% target. Meanwhile, unemployment remains low at 4.2%.
“We may have a new chairman at the Fed, but the old guard is watching the evolution of the economy with concern since the beginning of the year,” said Diane Swonk, an economist at KPMG, in statements to AFP. “The hawk bloc has not only hardened its stance. It has also added new members.”
In monetary jargon, “hawks” prioritise raising rates to contain inflation, while “doves” prefer low rates to stimulate the economy. Twelve members of the monetary policy committee have voting rights and must balance the goal of maximum employment with price stability.
Swonk anticipates discrepancies in this meeting: “The important thing is to observe how many members are willing to vote for a hike.” In June, during the first meeting chaired by Warsh, the decision was unanimous.
Warsh has reiterated his commitment to restoring “price stability” without specifying how. A rate increase would be a very unfavourable scenario for Trump, who promised to reduce inflation and financing costs. Before appointing Warsh, the president launched a harsh campaign against his predecessor, Jerome Powell.
Warsh recently stated before Congress that he “will continue to do his job” if he becomes a target of criticism from the Executive. He has also said that he values having “a good family fight” in Fed meetings, referring to intense and unconventional debates.
The drop in fuel prices in June provided some relief to consumers, but the resumption of hostilities in the Gulf this month has caused energy costs to rise. Economists point to other sources of inflationary tension: Trump’s tariffs, which raise import costs, and the frenzy surrounding artificial intelligence and data centres.
The AI boom drives economic activity and shareholder fortunes, but it also raises electricity bills for many households, increasing discontent among consumers.
The Fed will announce its decision on Wednesday at the end of the two days of closed-door debates. Investors will be attentive not only to the official rate but also to the projections and the tone of the statement, which will guide future steps.
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