The new Fed chairman argues that artificial intelligence will have a disinflationary effect, allowing interest rates to settle at lower levels. However, Kevin Warsh takes the helm at a time when a growing share of the Federal Open Market Committee (FOMC) is becoming more hawkish. So, what should investors expect from his first meeting as chairman, scheduled in less than two weeks?
First, the benchmark rate is likely to remain unchanged and the accommodative tone of the statement will be dropped. At the April meeting, that tone was challenged by a trio of dissenters concerned that the war in Iran could trigger a new wave of inflation. Since then, governors Christopher Waller and Lisa Cook have joined Federal Reserve regional bank presidents Beth Hammack, Lorie Logan, and Neel Kashkari in supporting the removal of the accommodative tone from the statement. It is unlikely that Warsh will oppose this; he has long questioned the usefulness of forward guidance.
Second, a more restrictive “dot plot” is expected. Although the new chairman may decide not to present his own projections, the median of the official estimates should not indicate further rate cuts this year, and some may even foresee an increase. The outlook for 2027 is less clear. The baseline assumption is that the Strait of Hormuz will be reopened during the year, allowing inflation to ease. However, after three months of disruptions, concerns are growing about second-round effects. Indicators such as the New York Fed’s Global Supply Chain Pressure Index suggest that supply chains are under increasing pressure and that price pressures are intensifying. As a result, the new dot plot could imply keeping benchmark rates unchanged through 2028. Whatever the median projection, in our view the distribution of dots will shift upward.
Third, inflation forecasts will likely be revised sharply upward. In March, officials had projected overall PCE inflation of 2.7% quarter-over-quarter by the end of this year. Inflation had already risen to 3.8% in April, largely driven by higher oil prices, making a substantial revision practically inevitable. Assuming oil prices evolve broadly in line with futures markets and some of the increase is reflected in other basket components, headline inflation should remain close to current levels for most of the rest of the year.
Core inflation will also need to be revised upward. At 3.2%, it is already half a percentage point above the year-end forecast made in March. Although tariff-related inflation should ease in the second half of the year, other factors—including the effects of the war and continued investments in artificial intelligence infrastructure development—should support price pressures. The median projection for core PCE inflation could thus close the year near the current rate. Forecasts for 2027 may also see a slight increase. This should indicate that, although Fed officials continue to believe that the inflationary impact should be limited in time, reflecting the view that the inflationary effects of the war remain largely temporary, these are proving more persistent than initially expected.
Fourth, growth forecasts are likely to take the opposite direction. In the first quarter, GDP grew only 1.5%, a figure below expectations, which suggests some downward revisions, especially for 2026. Nevertheless, authorities should forecast relatively solid economic performance for the rest of the year. Consumers have continued to spend, partly helped by tax refunds that supported real disposable income despite higher inflation. The rise in stock prices has likely stimulated spending among wealthier households through a wealth effect. Moreover, the boom in artificial intelligence investments continues to support business investment and employment. Since the end of last year, for example, employment in the construction sector has increased by 420,000 despite a decline in residential investment.
Finally, this resilience suggests that the current Fed members’ forecast, indicating an unemployment rate of 4.4% by year-end, may be too pessimistic. A revision to 4.3% or even 4.2% seems plausible. Labor market indicators continue to point to a context characterized by few hires and few layoffs but also suggest that demand and supply are substantially balanced. There are even timid signs of a recovery in demand. The latest JOLTS report shows that the ratio of job openings to unemployed workers rose to 1.03 in May, the highest level since January 2025.
Taken together, these developments indicate that officials’ risk assessment regarding their dual mandate is changing. Downside risks to the labor market appear less significant than before, while upside risks to inflation are increasing. The Summary of Economic Projections is likely to indicate that the next rate move is more likely to be an increase than a cut.
Warsh will probably avoid giving explicit forward guidance. The most interesting question is how inclined he will be to teamwork and to what extent his press conference statements will reflect the committee’s views rather than his own.
