The Federal Reserve is expected to conclude its latest meeting Wednesday with interest rates unchanged in a range of 3.5 to 3.75 percent. This will be the fourth consecutive meeting in which the central bank has voted to maintain its current policy settings, but the circumstances surrounding this decision are now entirely different.
The Fed has a new chairman, Kevin M. Warsh, who has pledged to lead a “reform-oriented” institution. There is an agreement in principle to end the war with Iran, which is a source of concern for officials given its impact on inflation. And the job market showed unexpected signs of strength.
On Wednesday, the Fed will issue a new policy statement alongside its rate decision at 2 p.m. in Washington. It will also release its latest economic projections, including a revised dot plot map where policymakers expect rates to change over the coming years. Mr. Warsh will hold his first Fed news conference at 2:30 p.m.
Here’s what to watch out for:
Goodbye guidance?
One of Mr. Warsh’s long-standing criticisms of the Fed is that its officials talk too often and focus too narrowly on sending short-term policy signals in the form of “forward guidance.” He wants the Fed to stop saying what it might do next and communicate publicly only when there is something interesting to say.
“The search for truth is more important than repetition,” he said during his Senate confirmation hearing in April. “If we have a press conference, we want to announce important news.”
On Wednesday, Mr. Warsh could move the Fed in this direction in two distinct ways. The first comes in the form of a political declaration. The most recent version from the April meeting contained a specific sentence that detailed the conditions under which the Fed would cut rates again.
“In considering the magnitude and timing of additional adjustments to the federal funds rate target range, the Committee will carefully evaluate incoming data, the evolving outlook, and the balance of risks,” the statement said, referring to the policy-setting Federal Open Market Committee.
Three committee members expressed formal disagreement with this aspect of the statement, arguing instead that the central bank should make it more explicit that a rate increase was just as feasible as a rate cut. Since then, several other policymakers have supported the Fed’s adoption of more neutral language, recognizing that inflation is moving further and further away from the central bank’s 2% target.
That sentence will likely be completely removed from Wednesday’s statement, partly reflecting Mr. Warsh’s opposition to the Fed sending signals about its next policy decisions.
The second change could take the form of the dot plot, which Mr. Warsh has repeatedly denounced for limiting the central bank’s ability to pivot when the economic context changes.
“The Fed is telling the whole world what their points are going to be, what their forecasts are going to be,” he said during his confirmation hearing. “Well, the Fed is human and then they hang on to these forecasts longer than they should.”
The Fed is still expected to issue a revised set of economic projections, but it could include one fewer set of estimates if Mr. Warsh chooses not to submit his own.
Whatever he decides, most policymakers are expected to lower their expectations for rate cuts from three months ago. At the time, the median estimate indicated support for a quarter-point reduction. Even then, seven of the 19 policymakers predicted no changes for the rest of the year.
More officials are expected to join that cohort on Wednesday, while a number of others are expected to forecast at least one rate increase by the end of the year.
Inflation and the war in Iran
The case for immediate cuts evaporated once war with Iran broke out. By May, the ensuing energy shock brought inflation to its highest level in three years. So far, price pressures have remained relatively contained in sectors most exposed to rising oil prices, such as transportation and shipping. But the surge has left officials on guard over the prospect of high inflation that could widen.
Sunday’s announcement of a preliminary agreement and the expected resumption of maritime activity via the crucial Strait of Hormuz will undoubtedly help to ease concerns. The price of Brent crude, the global oil benchmark, fell below $80 a barrel on Tuesday for the first time since the start of the war.
That should ease growing pressure on inflation expectations, which the Fed is monitoring closely for any indication that Americans are losing confidence in the central bank’s commitment to a 2 percent inflation rate. Market measures indicate that this has not yet been the case, even though the Fed has not achieved this goal in five years.
Compared with three months ago, officials are expected to significantly raise their inflation forecasts in the latest projections.
All eyes will be on Mr. Warsh and how he talks about the inflation problem facing the Fed. He has in the past criticized the Fed for its view of inflation, instead emphasizing the importance of alternative measures that eliminate volatile outliers.
“What I’m most interested in is the underlying inflation rate, not the one-time price change due to a geopolitical shift or a shift in the beef industry,” he said during his confirmation hearing.
“Reform” program
Changes to how the Fed communicates publicly and measures inflation are just two ideas Mr. Warsh has floated as part of his plan to lead a “reform-oriented” institution.
During his campaign for the job, Mr. Warsh said the central bank needed “regime change,” a term that has caused consternation inside and outside the Fed, who argue that the institution does not need a major overhaul.
Among Mr. Warsh’s other priorities is an overhaul of the Fed’s interventions in financial markets and its $6.7 trillion portfolio of government bonds and mortgage-backed securities. He argued that by purchasing these assets, the Fed fueled inflation, worsened inequality and distorted the pricing process in financial markets.
Mr. Warsh not only wants the Fed to maintain a smaller balance sheet, but also for there to be closer coordination with the Treasury Department on what the Fed holds in its portfolio and what the government issues in terms of debt to finance itself. On Wednesday, Mr. Warsh will likely be asked about his plans to reduce the Fed’s holdings, especially since the central bank has been buying short-term Treasury bonds since December to ensure there is enough liquidity circulating in the financial system.
He will also be asked how exactly he plans to structure a “deal” with the Trump administration, which has taken aggressive steps to encroach on the Fed’s independence. This includes the attempt to oust the incumbent Fed Governor, Lisa D. Cook, as well as the launch of a criminal investigation against Jerome H. Powell, Mr. Warsh’s predecessor. Mr. Powell announced in April that he would remain governor, a position he can hold until January 2028, to help protect the institution against further attacks from President Trump.
Mr. Warsh has in the past spoken directly about the importance of the Fed’s independence in setting rates. But his closeness to Mr. Trump, and the president’s earlier assertion that he would only choose someone to lead the Fed who supported rate cuts, forced Mr. Warsh to defend his credibility.
