Last week, the Fed held its final meeting as Chairman Jerome Powell, and as expected, kept interest rates unchanged. While interest rates remained the same, experts believe what changed was the Fed’s rhetoric on inflation.
The decision to keep interest rates unchanged was generally expected. What was unexpected was the change in the Fed’s definition of inflation. Previously describing inflation as “slightly high,” the Fed now states that inflation is high. Powell noted that inflation remains high and that rising energy prices, in particular, will create upward pressure in the short term.
In context, this also suggests that the interest rate cuts that markets are expecting later this year may be further away than previously anticipated.
FED Forecasts Are Changing!
On the other hand, this change in the Fed’s definition of inflation has also been reflected in the forecasts. In this regard, Barclays revised its Fed interest rate forecast.
Accordingly, Barclays withdrew its expectation that the Fed would cut interest rates in September and stated that it expects the Fed to keep interest rates stable until 2026.
Last week, Morgan Stanley also stated that they expect the Fed to keep interest rates stable throughout 2026.
While expectations for the Fed continue to shift following the latest interest rate decision and statements, Minneapolis Fed President Neel Kashkari has signaled a possible interest rate hike.
Neel Kashkari stated that the war could necessitate interest rate increases in some scenarios, saying that the ongoing war between the US and Iran for months has increased inflationary pressures, meaning the Fed might need to raise interest rates in certain scenarios.
Kashkari stated that the longer the war lasts, the more intense the inflationary pressures will become. He added that even if the war ends immediately, it could take months for supply chains and inflation to recover.
Kashkari emphasized that the Fed’s biggest challenge right now is the highly uncertain trajectory of inflation, and said that policymakers need to remain flexible when making future interest rate decisions.
Kashkari concluded by stating that he is willing to cooperate with Kevin Warsh, a potential future chairman of the Fed, and that he will take seriously some of the concerns Warsh has raised.
*This is not investment advice.