National Bank of Canada (NBC) Economics and Strategy team, led by Taylor Schleich, Ethan Currie and Vy Le, argues that Kevin Warsh’s Federal Reserve (Fed) is deliberately increasing policy ambiguity by stripping out forward guidance. Markets see a hawkish tilt and price a roughly even chance of a July hike, but the authors doubt a full hiking cycle as inflation is expected to ease and long-term expectations remain contained.

Warsh’s hawkish tone versus easing inflation

"The dust has settled after the Fed’s first decision under Kevin Warsh, resolving some uncertainty. But plenty of questions remain, with policy ambiguity a deliberate feature of this new-look FOMC."

"That was clear last week when investors received an ultra-slim rate statement with no forward rate guidance. This new communication strategy marks a clear departure from the Powell Fed, which ensured markets knew what to expect by decision day."

"Case in point: the next Fed meeting is priced as a toss-up (~40% hike odds) and may remain as such right up to July 29th."

"The curve will also depend on whether this apparent hawkish shift is reinforced with hikes or is just rhetorical. If the central bank really wanted to prove it was laser-focused on price stability, a hike next month would make that clear (and Thursday’s PCE data won’t argue against such a move)."

"Instead, we expect many officials will balk at starting a new hiking cycle right when inflation begins easing (which it will start to do in June) and with inflation expectations that aren’t all that alarming."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)