Will the Federal Reserve cut interest rates? What to expect from Kevin Warsh’s first meeting
Rising inflation, continued uncertainty with the war in Iran — despite the announcement of a peace deal — and other central banks moving to increase their interest rates may complicate the path forward, experts say.
It is a big week for the newly minted Chairman of the U.S. Federal Reserve Kevin Warsh, who is overseeing his first Federal Open Market Committee, or FOMC, meeting on Tuesday. Meeting every six to eight weeks, the Fed’s policymakers will convene to deliberate on any future cuts to interest rates.
The Fed has strongly signaled it will leave rates unchanged this week; but rising inflation, continued uncertainty with the war in Iran — despite the announcement of a peace deal — and other central banks moving to increase their interest rates raises the stakes for policymakers and may complicate the path forward, experts say. A decision is expected on Wednesday.
William Dickens, university distinguished professor emeritus of economics and public policy, said that the Fed is in “an impossible position,” citing the role that continued disruptions to oil and fertilizer supplies, semiconductor production and global shipping are having on the U.S. economy. He also noted that the bond market, which acts as a barometer for confidence in the federal government’s fiscal health, is showing signs of strain amid concerns that the nation’s borrowing has become unsustainable.
Warsh, President Donald Trump’s pick to head the Fed, is entering the role under intense scrutiny and at a pivotal moment, experts say. Widely thought of as an “inflation hawk,” meaning he has favored aggressive measures to combat rising prices, Warsh now faces a unique challenge of responding to an uptick in inflation while also facing pressure from the president to lower rates.
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“I can’t imagine that anything would lead the FOMC to cut rates,” Dickens said. “Raising rates over Warsh’s objection is a possibility, but my bet is that they hold rates constant with guidance that they are keeping their eyes on inflation and the state of the world economy.”
Continued hawkishness by the Fed would reflect the fact that, among other things, overall inflation rose 4.2% in May compared to last year. But Dickens added that monetary policymakers will be closely watching the tense situation in the Strait of Hormuz, where about one fifth of the world’s oil travels.
Others agree with the projected wait-and-see approach.
“The inflation report is worrying, but I doubt it leads to a rate hike in Warsh’s first meeting,” Jai Kedia, a research fellow at the Cato Institute’s Center for Monetary and Financial Alternatives, a research organization within the Washington, D.C.-based think tank, told Northeastern Global News.
“While a case could be made for a 25 basis point hike,” she said that core inflation, which excludes volatile sectors such as food and energy, remains closer to 3%, which suggests that underlying price pressures have not fully subsided.
Kedia said that fact might provide enough justification for Fed officials to leave rates unchanged.
This week’s meeting comes just days after the European Central Bank (ECB) raised its benchmark interest rates by a quarter percentage point to 2.25%, its first increase since 2022. European officials cited concerns that higher energy costs tied to the war in Iran could keep inflation elevated even as economic growth slows, warning that the outlook remains highly uncertain. The Bank of Japan also raised rates to its highest level — from 0.75% to 1% — in more than three decades.
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Joseph E. Gagnon, a senior fellow at the Peterson Institute for International Economics, a Washington, D.C-based think tank, said that officials shouldn’t read too far into the ECB’s decision, noting its rates were lower than the Fed’s to begin with. He also said the ECB has historically been more willing than the Fed to respond to energy-driven inflation pressures.
“I think that has been a mistake in the past. But now, after so many years of inflation above target, the ECB may be right,” Gagnon said.
This week’s meeting also comes as Washington and Tehran verge on a potential deal to end the conflict that has been waged since late February, offering hope of relief for global energy markets following months of volatility. The two sides have preliminarily agreed to a peace framework that would reopen the Strait of Hormuz, halt hostilities for 60 days and begin a new round of negotiations over Iran’s nuclear program and sanctions relief.
For Dickens, news of a potential peace deal doesn’t fundamentally change the calculus for monetary policymakers. He said it could be yet another “TACO” (“Trump Always Chickens Out”) moment, noting that substantive negotiations have yet to take place.
On the whole, Gagnon said he believes the Fed is likely to hold rates steady this month and potentially into the fall. He said that, until a few months ago, it seemed likely that the Fed would continue to cut its policy interest rate at least one or two more times this year.
“But the continued strength of the labor market and the sharp rise in energy prices has caused everyone, including voting members of the Fed’s policy committee, to abandon those plans,” Gagnon said.
