San Francisco Frontiers - US Federal Reserve expected to hold rates steady as inflation swirls

Warsh was chosen to lead the US central bank by Trump, who has made his demand for lower interest rates clear as he has exerted unprecedented pressure on the independent monetary policy making body.

After two days of closed-door sessions, the Fed's open market committee (FOMC) will announce its decision on Wednesday at 2:00 pm (1800 GMT), followed by a press conference by Warsh.

Most investors expect the Fed to hold rates steady at 3.50-3.75 percent for the fifth straight meeting, according to CME's FedWatch monitoring tool.

US consumer inflation eased to 3.5 percent year-on-year last month, but remains far higher than the Fed's long-term two-percent target, which it has not achieved for more than five years.

Since last week, a ramping up of hostilities has seen intense US strikes and Tehran's retaliatory action targeting Washington's allies across the region, while Yemen's Houthi rebels have threatened to blockade the Red Sea oil trading route.

The fighting has sent energy prices soaring once more, with the benchmark oil futures contract breaching $100 per barrel for the first time since late May, when energy prices were on their way down.

At the Fed, policymakers have been losing patience with persistent inflation, indicating that a rate hike may be near.

The Fed "has to be ready to tighten monetary policy to prevent a repeat of the 2021-to-2022 inflation episode," Fed Governor Chris Waller said last week.

"Sternly staring at inflation until it melts before our withering gaze is not an option."

- 'Hawkish core' -

Since taking office, Warsh has vowed to reduce or eliminate the amount of forward guidance the Fed provides on its decision-making process, a move that has received mixed reactions.

The new chairman has said that providing forward guidance locks policymakers into positions that they may need to change. Some analysts, however, argue that opacity in decision-making creates more uncertainty for markets.

In public statements since taking control of the Fed, Warsh has said he has a "resolute commitment" to delivering price stability, but has not offered details on how and when he thinks it would be appropriate to act.

The Fed has a dual mandate to keep inflation to its long-term target while also delivering maximum employment.

Its main tool to achieve this is the economy's key interest rate -- raising rates tends to curtail economic activity and high prices, while lowering them encourages hiring and investment but can also stoke inflation.

The US labor market has largely stabilized, with steady unemployment despite zigzagging job growth, leaving policymakers mostly focused on inflation.

"'Resolute commitment' is, in my opinion, insufficient to tighten monetary policy and curb any inflationary pressures," said Gregory Daco, chief economist at EY-Parthenon.

With Warsh largely remaining silent, several other policymakers have been vocal about their concern over high prices and the potential need for action in the near-term.

"When you create a vacuum, it's oftentimes the case that the vacuum gets filled," said Daco.

With headline inflation dipping in June, ahead of further rises expected ahead, analysts say they do not expect a rate hike at this meeting -- but that the decision will likely see some dissenting voices.

"We may have a new chairman, but the old guard is now worried about where the economy has moved since the beginning of the year," Diane Swonk, chief economist at KPMG, told AFP.

Inflation has been under pressure not just from rising fuel prices due to the war, but also due to heightened demand from the AI boom and the continued effect of Trump's tariffs rippling through the economy.

"The hawkish core of the Fed has not only hardened but it's broadened," said Swonk, who expects two rate hikes later this year.

W.Thompson--SFF