What To Expect From Wednesday's Fed Decision: Flat Interest Rates and a New Direction

Key Takeaways

• The Fed is widely expected to keep its key interest rate unchanged as it remains in "wait-and-see" mode.
• Wednesday's meeting will be the debut of Chair Kevin Warsh, who has promised "regime change" at the Fed.
• Among the major open questions is whether Warsh will resume advocating for cutting interest rates.

The Federal Reserve will have its first meeting under the new management next week, and no one is entirely sure exactly what to expect.

One thing is nearly certain: the central bank is overwhelmingly likely to keep its influential fed funds rate flat for the time being. Financial markets are pricing in a 96% chance the Fed will hold rates steady, according to the CME Group's FedWatch tool, which forecasts rate movements based on fed funds futures trading data.1

Beyond that, however, there are many open questions about how Warsh will lead the Fed into its next era.

Warsh is taking leadership of the Fed at a time when it faces increasing risks to its dual mandate from Congress to keep inflation in check and employment high. The former Fed governor's approach to monetary policy will be tested immediately: the Iran war is pushing up energy prices, threatening to stoke more persistent and widespread inflation.

Will Warsh Push For Rate Cuts?

Warsh has been silent about his prescription for the Fed's monetary policy since President Donald Trump began considering him for the nation's top banking job last year. Before that, however, he advocated for a lower fed funds rate, in line with Trump's frequently repeated demands.

Whether that preference has survived the past year of economic changes is one of the major open questions that could be answered at Wednesday's meeting.

The fed funds rate is central bankers' main tool for managing monetary policy. The Fed raises it when its goal is to push up borrowing costs across the economy to discourage borrowing and spending and stifle inflation. Its playbook calls for rate cuts when the economy is weak and inflation is low, thereby boosting the job market.

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These days, high inflation ison the minds of many policy committee members, since the Iran war has pushed up prices for gasoline and other necessities. Meanwhile, the job market has remainedresilient, with unemployment near historic lows.

Given the recent resurgence of inflation, Warsh may find it a tough sell to convince a majority of the committee that a cut is the right move, even if he thinks so.

"If a very dovish Warsh shows up, that may breathe some life into the utterly deflated prospects for a cut," economists at Wells Fargo Securities led by chief economist Tom Porcelli, wrote in a commentary. "Unfortunately for Warsh (assuming he actually does have dovish leanings), the economic reality is recent data and our sense of the FOMC's reaction function argue there is a high hurdle to cut at this juncture. But let's see what he has to say."

What Will He Say About The Fed's Intentions?

Questions surround not only what Warsh will say, but how much.

Under previous Fed Chair Jerome Powell, the central bank's monetary policy moves rarely came as a surprise, since the committee telegraphed their thinking well in advance. That could change under Warsh, who has criticized the Fed's policy of issuing "forward guidance," arguing that it makes central bankers too reluctant to change their minds about policy when they need to pivot quickly.

On Wednesday, the FOMC is scheduled to provide forward guidance in the form of a quarterly summary of economic projections from its policymakers. Warsh has been critical of that practice, and Wednesday would be his first opportunity to make a change.

The Fed chair's traditional post-meeting press conference Wednesday afternoon will be another chance for Warsh to make a break from his predecessors: Warsh could be more guarded than Powell about his thinking about future monetary policy, and has also criticized the frequency of the conferences, so it's possible he could hold them less often.

Warsh could also make his mark by removing forward guidance from the FOMC's official statement that's issued alongside the committee's rate decision. Under Powell, the statement typically indicated what the Fed expected to do next with monetary policy. For example, the most recent statement contained faint hints that the Fed's next rate move will be a cut, language that some hawkish FOMC members opposed.

"We suspect his initial efforts will be to pare back the Federal Reserve's communications in a less-is-more strategy," Michael Pearce, chief U.S. economist at Oxford Economics, wrote in a commentary. "That could rapidly appear in the form of paring back the policy statement to include less forward guidance."

What Will Warsh's 'Regime Change' Look Like?

Beyond that, Warsh has promised "regime change" at the Fed, and Wednesday will be his first chance to say what changes he intends to make. At his confirmation hearing, Warsh said he would change how the central bank measures inflation, for instance, and also said the Fed should reduce the size of its balance sheet.

"The more interesting question heading into next week is not what the Fed decides, but what Warsh's debut tells us about how he intends to lead the institution and how he plans to earn the credibility to eventually move rates in either direction," Jake Krimmel, senior economist at Realtor.com, wrote in a commentary.

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1. CME Group. "FedWatch tool."

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