In this Q&A, Joseph Purtell, portfolio manager at Neuberger, weighs in on the appointment of Kevin Warsh as the new US Federal Reserve Chair, ahead of his first meeting on Wednesday.
Joseph answers how the market situation might differ from Jerome Powell’s tenure, discussing what to expect from the Fed’s latest decision, the implications of rising energy prices and global conflicts, and the outlook for monetary policy in the months ahead.
The meeting on 17 June will be the first chaired by Kevin Warsh. What do you expect from this debut, and what differences might the market begin to notice compared to Jerome Powell’s tenure? What do you think will be the Federal Reserve’s main message at this meeting?
We expect that Warsh’s first meeting will be about continuity rather than radical change. Warsh has signaled he would like to, among other things, reexamine the communication practices at the Fed; this will likely occur gradually over time. As such, we expect the market will largely acquiesce to whatever stylistic differences he brings relative to Powell without major issue. We also expect the main message to be that the Fed is on hold until it gains more certainty on the Middle East conflicts.
Is it likely to maintain a cautious stance whilst awaiting further data, or could it begin to prepare the market for a change of course in the second half of the year?
The stance remains cautious, as too much uncertainty is ongoing. Warsh may discuss possible scenarios without committing to any set course, and we view it as premature at this point to prepare the market for a move in either direction.
International conflicts continue to generate uncertainty regarding energy, trade and supply chains. To what extent do you think they are influencing the Fed’s decisions?
Energy is having a major influence: the increase in oil and related commodities from the conflict is raising producer and consumer prices, leading to higher near-term inflation. Supply chains and trade are related as well, and worth watching, but currently the effects are more muted relative to energy.
Could recent movements in commodities, particularly energy, delay any process of monetary easing?
Yes. The market has already removed the easing bias out of the US and even priced in a slight tightening bias.
Is there a risk of a second wave of inflation if the US economy remains strong or if oil prices rise again?
Possibly – this is a complicated question – but not our base case. The main risk of persistent, embedded inflation involves a change in expectations – the psychology of inflation – and this remains well-anchored at this juncture.
Oil prices rising again would pass through to end consumer goods (e.g. retail gas prices) and mechanically raise headline inflation. Whether this produces a “second wave” of inflation that is higher and longer-lived than current expectations will depend on many aspects, principally monetary and fiscal responses.
What do you think concerns the Fed most today: inflation that is reluctant to converge towards the target, or a possible slowdown in economic activity and employment?
Currently the concerns are squarely on inflation. We expect that as this shock passes, employment will come back to the foreground later this year.
Is it still reasonable to expect rate cuts in 2026, or does the current scenario point to higher rates for longer?
Our current base case is no rate cuts for the remainder of 2026 as the Fed waits to see how the various geopolitical and commodity uncertainties resolve. We expect them to cut twice in 2027 as we forecast lower inflation and some potential upset in labor markets.
Has the market debate shifted from “how many cuts will there be” to “when will the first cut come”?
Yes, and perhaps more strongly “Is the next Fed move a hike or a cut?”
Looking ahead to the second half of the year, what do you think is the main risk to the Federal Reserve’s roadmap today?
Both inflation and labour. While inflation carries more salience today, we expect the labor discussion to remerge in the second half of this year.
