Fed's Walsh Maintains Rate Hike Pause Amid Inflation Concerns

Written by Bu Shuqing

Source: Wall Street Journal

Kevin Warsh's first FOMC meeting since taking over the Fed has drawn significant attention, but market expectations for his initial actions are extremely limited.

At 2:00 AM Beijing time on Thursday, the Federal Reserve will announce its latest interest rate decision. According to a CNBC survey of the Fed, 32 economists, fund managers, and strategists surveyed generally believe the Fed will not adjust interest rates at this meeting or at any meeting before 2027.

Meanwhile, 88% of respondents expect the Fed to remove the "dovish tilt" language from its statement this week—a phrase that had previously suggested the next move would be a rate cut. This expected adjustment signals that market expectations for a rate cut have officially been removed from the near-term outlook.

High inflation is the primary reason interest rates remain unchanged. Respondents noted that Trump administration tariffs and the U.S.-Iran conflict have pushed inflation higher, nearly eliminating room for rate cuts. Meanwhile, although Walsh is generally viewed as dovish, he has taken over a committee with a clearly hawkish stance, as some officials have publicly stated that rate hikes should remain an option if inflation continues to exceed the target.

The survey results show that respondents' forecasts for the federal funds rate remain largely unchanged at the current level of 3.62% through 2027. Although high oil prices pose inflationary pressure, respondents do not believe this will trigger an interest rate hike.

EY Chief Economist Gregory Daco said: “Although Walsh is generally viewed as dovish, he will be taking over a committee with a clearly hawkish stance. Several policymakers have recently argued that rate hikes should remain an option if inflation remains above target, and energy-driven inflationary pressures will only further reinforce this tendency.”

Wash himself has previously indicated that rates could be lower, but he has not clearly stated whether he has adjusted his outlook in light of recent inflation rebound and stronger employment data. After the survey was completed, news of a potential agreement between the U.S. and Iran emerged, which may provide Wash with room to cut rates earlier than expected; however, this remains uncertain for now.

John Ryding, Chief Economic Advisor at Brean Capital, holds a more hawkish stance, stating: “The Federal Open Market Committee should raise interest rates to curb rising inflation expectations and bring policy closer to a neutral level.” Guy LeBas, Chief Fixed Income Strategist at Janney Montgomery Scott, also noted that the short-term vulnerabilities in the labor market have passed, and the Fed’s dual mandate is clearly tilting toward inflation.

Despite a tightening interest rate outlook, improvements in economic fundamentals have provided Wash with a relatively favorable environment for taking office.

Respondents raised their 2026 U.S. GDP growth forecast to 2.2%, an increase of 0.25 percentage points from the previous survey; the 2027 forecast was set at 2.3%, both recovering most of the prior declines triggered by U.S.-Iran tensions. The probability of recession fell from 33% in April to 25%, while unemployment rate expectations for this year and next remained largely unchanged near the current level of 4.3%.

Economist Hugh Johnson wrote: "Improved economic and employment conditions, along with moderate stock price gains, are common characteristics of the current stage of the stock-economy-interest rate cycle. Early warning signals of a bull-market-ending recession have not yet appeared."

Many respondents believe that a healthy job market means the Fed should focus on its inflation target—a goal it has failed to achieve for most of the past six years.

Beyond monetary policy, respondents widely agreed with Wash’s proposals to reform the Fed’s communication approach.

The survey found that 59% of respondents believe Fed officials speak too much, while only 38% think the amount of communication is appropriate—aligning closely with Walsh’s advocacy for reduced public statements. However, 59% of respondents expect Walsh to hold a press conference after every meeting—a contrast to his refusal to commit to such a practice during his April Senate confirmation hearing.

On the "dot plot" issue, 53% of respondents believed the tool should be completely eliminated. Various reform proposals, including releasing the dots days after the meeting or linking them to officials’ specific economic forecasts, were rejected by a majority of respondents.

Inflation was identified as the top growth risk, followed closely by the bursting of the AI bubble. 84% of respondents believe AI stock valuations are elevated, a 6-percentage-point decrease from December last year, with an average overvaluation of approximately 21%. Additionally, 69% of respondents think overall stock market valuations are expensive, though this is the lowest level in nearly a year.

Drew Matus, Chief Market Strategist at MetLife Investment Management, warned: "The gap between the reality and expectations of AI poses a risk to the stock market and consumers who rely on the wealth effect. The wealth effect is likely to become the transmission channel for the next economic downturn."

Respondents held a relatively conservative outlook on the stock market, expecting the S&P 500 to approach 8,000 points only by 2027, representing a modest increase of approximately 5.5% from current levels.

In contrast, concerns about credit market risk have eased. Currently, only 53% of respondents believe that systemic risk in the credit market has "increased," down from a high of 75% in March this year, with an additional 3% saying the risk has "significantly increased."

John Donaldson, Director of Fixed Income at Haverford Trust Co., said: “Despite some pessimistic forecasts, we have not seen broad threats to the credit market; any weakness is confined to CCC and CC-rated credits, and credit spreads in the financial sector show no signs of stress.”