Commerzbank’s Bernd Weidensteiner and Christoph Balz argue that Kevin Warsh’s first Federal Reserve meeting is unlikely to deliver an immediate rate cut, given elevated PCE inflation and a still‑solid labor market. They expect the Fed to drop its easing bias next week, then only begin a gradual cutting cycle around mid‑2027, constrained by inflation risks and political pressure.

Warsh unlikely to cut near term

"However, an interest rate cut is unlikely to be seriously on the table next week. This is because inflation risks have continued to rise since the last meeting in April. Based on the comprehensive inflation measure preferred by the Federal Reserve—the deflator of personal consumption expenditures (PCE) —prices in April were 3.8% higher than a year earlier."

"Since the inflation rate is well above the Fed’s 2% target and is actually moving further away from it, a rate cut would only be justified if the Fed were to completely miss its second goal of full employment. In fact, the labor market has recovered from the slump it experienced last fall. At that time, the unemployment rate had risen to 4.6%, prompting the Fed to cut rates three times."

"We expect the central bank to remove the “easing bias.” While Kevin Warsh will have no objection to an interest rate cut as the next step, he generally does not believe in signaling future interest rate moves. He could therefore agree to calls to eliminate the wording, even if he does not share the substantive arguments."

"Warsh won’t have a better chance of pushing through an interest rate cut until next year. By then, the inflation rate is expected to fall again, as the price-driving effects of tariffs and the higher energy costs resulting from the conflict in the Persian Gulf should begin to subside. In addition, Warsh expects that the introduction of artificial intelligence (AI) will significantly boost productivity, as was the case during the “New Economy” of the 1990s and early 2000s."

"We continue to expect that, due to inflation risks, calls for interest rate hikes will grow louder in the coming months, but that this will not become the prevailing view within the FOMC. If the situation in the Persian Gulf eases and oil prices—and thus the inflation rate—fall again, sentiment is likely to shift and the question of interest rate cuts will resurface. Starting around the middle of next year, the Fed will likely begin cutting interest rates, by 75 basis points through the end of 2027."

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