New Fed Chair Kevin Warsh used his first FOMC meeting to send a clear message.
The Fed’s inflation credibility remains the priority, and rate hikes remain firmly on the table if the data warrants it.
While Warsh avoided explicit forward guidance, he made a deliberate effort to present himself as aligned with the committee and to lead from the centre. That included refraining from submitting his own projections to the SEP, helping reinforce the impression of a Chair focused on consensus-building, rather than imposing a personal policy path from the outset.
At the same time, the broader inflation picture has become increasingly difficult for the Fed to look through. The Iran deal has reduced near-term energy pressure, but the durability of that relief remains uncertain. Oil prices have already fallen sharply on hopes of improved flows, yet the persistence of the energy shock is still an open question, particularly with key details of the agreement unresolved.
More importantly, upside risks to core inflation now extend well beyond energy.
Tech-related and AI-driven price pressures continue to move through the system, with pipeline inflation for core goods still building into year-end and core services remaining sticky. Core PCE forecasts have already shifted materially higher, and further AI-related inflation effects could push the outlook closer to a 4-handle into end-2026.
That leaves the Fed facing a familiar but increasingly uncomfortable dilemma. Labour market data has remained resilient, inflation risks are broadening, and even some of the more dovish arguments within the committee are becoming harder to sustain. Warsh may want to avoid appearing overly hawkish for political and institutional reasons, but he also cannot afford to look soft on inflation at the start of his tenure.
This balance was evident in the meeting itself.
Warsh did not pre-commit to a hiking path, but he kept the door open to tightening and used the meeting to reinforce an old-school commitment to the inflation target. In doing so, he broadly delivered the outcome we had expected. A Chair trying to build credibility by leading from the centre while preserving optionality for rate hikes.
Market pricing has now moved closer to this view, with July and September increasingly aligned with the idea that the Fed may need to keep tightening risk alive. September remains a particularly live meeting, especially if core PCE forecasts continue to drift higher over the coming months.
This also has important implications for the curve and the dollar. Fed hike risk, combined with the two-phase impact of AI on inflation dynamics. Initially inflationary, later potentially disinflationary. This supports the case for further US curve flattening. Meanwhile, the dollar now looks more asymmetric to the upside, particularly if markets continue to price a more credible tightening path under Warsh.
Overall, the post-FOMC message is clear.
The Fed has not moved to explicit forward guidance, but the direction of travel is more hawkish than before. If inflation continues to surprise to the upside, Warsh may have little choice but to guide the committee towards a tightening bias, with rate hikes gradually coming back into view later this year.