The Federal Reserve held its final meeting as chair Jerome Powell last week, leaving interest rates unchanged as expected. While interest rates remained the same, experts believe it was the Fed’s rhetoric on inflation that did.
The decision to keep interest rates unchanged was largely expected. What was unexpected was the Fed’s change in the definition of inflation. The Fed previously described inflation as “moderately high,” but now says it is high. Powell noted that inflation remains high and that rising energy prices, in particular, will create upward pressure in the near term.
This also suggests that the rate cuts that markets are expecting later this year may be further away than previously expected.
FED forecasts are changing!
Meanwhile, this change in the Fed’s definition of inflation is also reflected in its forecasts. In this context, Barclays has revised its Fed rate forecast.
In response, Barclays reversed its expectation that the Fed would cut rates in September and said it now expects the Fed to keep rates stable through 2026.
Morgan Stanley also said last week that it expects the Fed to keep interest rates stable through 2026.
As expectations for the Fed continue to change following the latest rate decisions and statements, Minneapolis Fed President Neel Kashkari has hinted at the possibility of a rate hike.
War could require rate hikes in some scenarios, Neel Kashkari said The months-long war between the U.S. and Iran has increased inflationary pressures, meaning the Fed could need to raise rates in certain scenarios.
Kashkari said the longer the war lasts, the more inflationary pressures will increase. He added that even if the war were to end immediately, supply chains and inflation could take months to recover.
Kashkari emphasized that the Fed’s biggest challenge right now is that the trajectory of inflation is highly uncertain, and said policymakers need to remain flexible in determining future interest rates.
Kashkari concluded by saying he is ready to work with future Fed chairman candidate Kevin Warsh and takes seriously some of the concerns Warsh has raised.
*This is not investment advice.
