All eyes are on the Federal Reserve tonight as it prepares to announce the outcome of its first policy meeting under new Chair Kevin Warsh. While holding interest rates steady is a near certainty, the real suspense lies in the potential shift in policy language, a significant upward revision to inflation forecasts, and the first hints of rate hike expectations in the "dot plot." The market hangs on every word Warsh might utter during his inaugural press conference.

The Federal Open Market Committee, under the new leadership of Kevin Warsh, will conclude its meeting early Thursday morning Beijing time. The decision to keep the federal funds rate target range unchanged at 3.50% to 3.75% is widely anticipated. However, the true variables for this "debut" are far more complex than the rate decision itself, with significant market focus on the nuances of the policy statement, the economic projections, and the signals from Warsh's press conference.

Policy Statement: A Shift in Tone

In terms of the policy statement, major institutions like Goldman Sachs, Bank of America Securities, and Morgan Stanley anticipate the removal of the "easing bias" language that has been in place for months. This would signal the committee's formal communication to markets that the likelihood of a rate cut is now balanced against the possibility of a hike.

Concurrently, the updated economic projections are expected to show a substantial upward revision to inflation forecasts. Goldman Sachs expects the median 2026 core PCE forecast to be revised up from 2.7% in March to around 3.3%. The median "dot plot" projection is likely to shift from "one rate cut this year" to "no change this year," with a few dots appearing for a potential rate hike. While the advancement of a US-Iran agreement has led to a significant retreat in oil prices from recent highs, alleviating some external inflationary pressure, the stickiness of core inflation continues to constrain policy space.

The Main Event: Warsh's Press Conference

The spotlight will be firmly on Warsh's press conference. Bank of America Securities notes that if he characterizes recent inflation as a one-off supply-side shock and emphasizes the disinflationary potential driven by AI, long-end rates could face selling pressure. Conversely, if he explicitly endorses a path toward rate hikes, the 2-year SOFR could rise by about 15 basis points, providing directional support for the US dollar. Goldman Sachs characterizes this press conference as a pivotal node for "divergent outcome paths under the same rate decision," with various asset classes like rates, FX, equities, and gold having positioned for event hedging.

While former President Trump appointed Warsh with expectations for rate cuts, the committee Warsh now leads has quietly shifted rapidly towards a more hawkish stance. Persistently high inflation and strong employment data have led several officials to publicly state that rate hikes should remain an option. His debut will unfold amidst contradictory data, divided expectations, and his own intention to maintain some policy ambiguity.

The Rate Decision: On Hold, But Not Idle

Maintaining the current interest rate range is virtually a market consensus for this meeting. A Reuters survey of 102 economists showed 72 respondents expect rates to be held steady through the end of 2026. In money markets, the US-Iran conflict initially pushed oil prices higher, leading markets to fully price in a rate hike this year. As talks progressed and oil prices retreated significantly from their peaks, these expectations have narrowed. The market currently prices in about 18 basis points of cumulative tightening by year-end, implying roughly a 72% probability of a 25-basis-point hike.

The vote is expected to be unanimous. Bank of America Securities believes hawkish members should be satisfied with the removal of the easing bias, while the previous dissenting vote in favor of a rate cut came from former Governor Stephen Miran, who has been replaced by Warsh. Although Warsh is generally perceived as dovish, the bank explicitly states he will not advocate for a rate cut at his first meeting.

Statement Language: The End of the Easing Bias

The adjustment in the statement's language is the most certain change at this meeting and the most direct signal of the committee's shifting stance. The current phrasing has long been interpreted as hinting that the next move is more likely to be a cut.

At the April meeting, three voting members already expressed dissent regarding the removal of this bias. Subsequently, Governor Christopher Waller's remarks became a key turning point. This official, previously seen as a leading dove on the committee, stated publicly in May that based on recent data, he supported removing the easing bias to clarify that a cut is no more likely than a hike. Goldman Sachs believes Waller's stance represents a collective shift within the dovish camp.

There is some divergence in expectations regarding the exact method of revising the language. Bank of America Merrill Lynch expects the committee might delete the word "additional" or even remove "extent and timing," replacing it with the more neutral "any adjustments." Warsh might even push to delete the entire forward guidance paragraph, consistent with his long-standing criticism of such guidance. Goldman Sachs also expects the related phrasing to be removed and notes there is room for further shortening and simplification of the statement due to overlapping content in some paragraphs.

The description of the labor market is also expected to be upgraded. Bank of America Merrill Lynch anticipates the current phrase "job gains have been modest" will be revised to reflect recent months of strong non-farm payroll reports, possibly changing to something like "job gains have picked up, and the unemployment rate has remained largely stable in recent months."

The Dot Plot: Major Inflation Revisions, First Hints of Hikes

This updated Summary of Economic Projections (SEP) is expected to show the most pronounced hawkish shift in this monetary policy cycle. On macroeconomic forecasts, Goldman Sachs expects the median 2026 PCE inflation forecast to be revised up sharply from 2.7% in March to around 3.9%, with core PCE rising from 2.7% to around 3.3%, primarily reflecting the combined impact of energy shocks from the Iran conflict and AI-related memory price increases. The GDP growth forecast is expected to be revised down from 2.4% to around 2.2%, while the unemployment rate forecast is slightly lowered to 4.3%.

Regarding the interest rate dot plot, Goldman Sachs expects the median 2026 rate to remain at 3.625%, but with about 4 to 5 dots clustered at 3.875%, meaning a minority of officials have incorporated a rate hike into their baseline forecast for this year. Bank of America Securities notes its baseline scenario involves three officials submitting hike projections, with others potentially following. A strategist stated that with a year-end core PCE forecast around 3.4%, market pricing will stay near 3.875%, and a hike premium will persist even if a peace deal is reached.

A key variable is whether Warsh himself will participate in the SEP. Both Bank of America Securities and Deutsche Bank expect he will not submit a forecast, citing his short tenure and, more fundamentally, his systemic skepticism of forward guidance tools. If Warsh is absent from the dot plot, it would implicitly shift the median in a hawkish direction, as his potentially lower rate projections would be excluded from the calculation.

Goldman Sachs' baseline forecast shows the Fed's final two rate cuts landing in June and December 2027. However, it also notes that a "higher for longer" flat path is a plausible alternative scenario, and the probability-weighted rate forecast remains more dovish than current market pricing, primarily reflecting the bank's lower probability assessment of a hike scenario.

The Press Conference: Warsh's Policy Style Takes the Stage

Warsh's first post-meeting press conference is the core market risk event. How he balances the hawkish committee with his personal dovish leanings will provide the first-hand material for markets to assess his policy framework.

Based on his public stance, Warsh has repeatedly emphasized opposition to excessive forward guidance during his confirmation hearings, advocating for balance sheet reduction and a return to interest rates as the core policy tool. He favors using the Dallas Fed's trimmed-mean PCE (currently around 2.35%) as an inflation reference, believing it more accurately reflects underlying inflation pressure than core PCE, and has questioned the accuracy of the current inflation measurement system.

Bank of America Securities' baseline expectation is that Warsh will deliver a mildly dovish signal at the press conference: characterizing the Iran conflict as a one-off energy shock that does not materially alter inflation fundamentals; emphasizing the disinflationary potential of AI-driven productivity gains; and reiterating that monetary policy should remain forward-looking and not be swayed by single-month energy price volatility. However, the bank also clearly states that recent data is not yet sufficient to support advocating for a near-term rate cut, and Warsh will emphasize patience, preserving room for easing later in the year.

The overall expectation from trading desks is that Warsh will acknowledge inflation is above target and the labor market is firming but will not give clear directional guidance on a future tightening path. Instead, he may express a "neutral stance, ready to act in either direction"—a formulation that could help him unite differing internal committee opinions and avoid unnecessary market volatility at his first meeting.

Bank of America Securities also notes Warsh might announce a change to holding press conferences quarterly instead of after every meeting, which itself would constitute a significant signal of communication reform. Goldman Sachs does not expect Warsh to address issues like reducing FOMC size, balance sheet runoff, or formally ending forward guidance at this meeting.

Economic Backdrop: Sticky Inflation Meets Resilient Employment

Ahead of this meeting, economic data has presented a pattern of "strong employment, sticky inflation," setting the tone for the committee's policy discussion. On employment, the May non-farm payroll report marked the third consecutive month of robust job gains. Even with growth below potential and oil prices weighing on consumption, the unemployment rate is expected to rise only slightly, with the overall labor market remaining on a solid track.

On inflation, energy shocks have pushed up headline inflation, with full-year PCE inflation expected to exceed 4% and core PCE to stay above 3% for the year. As the US-Iran agreement progresses and oil prices retreat, some economists believe May might have been the peak month for headline inflation, contingent on the smooth reopening of the Strait of Hormuz. It is believed the combined impact of tariffs, energy prices, and AI-related memory price increases on core PCE has passed its most extreme phase, with monthly gains expected to gradually decline through the year. However, inflation is likely to remain above the Fed's 2% target for the foreseeable future.

It is noted that strong labor market data allows the committee to focus its attention on whether the inflation situation has deteriorated enough to warrant a rate hike. The anchoring of core inflation expectations and the breadth of high inflation data will be key dimensions for the committee's future policy judgment.

Market Impact: Divergent Responses Across Asset Classes

Various asset classes have formed their own frameworks for responding to this FOMC meeting. In rates markets, a neutral-to-dovish stance from Warsh could be interpreted as hawkish relative to data-dependent expectations. Investors are advised to consider positioning for higher short-term yields and a flatter yield curve. A strategist noted that front-end rates have limited room to fall significantly; a clear weakening in the labor market is needed for expectations to shift from hikes to cuts.

In FX markets, hawkish adjustments to the statement and SEP are largely priced in. The biggest upside risk for the US dollar comes from a more hawkish-than-expected press conference by Warsh. If he downplays recent inflation citing the Iran deal, the dollar could face near-term downward pressure. Current G10 currency option pricing for the meeting gap is at the higher end of the recent range, but holding volatility into the event may still be attractive from a risk-reward perspective.

In equity markets, the event risk is two-sided: a dovish or neutral stance from Warsh could extend the recent stock market rebound, while an explicitly hawkish stance would pose a major threat to risk asset positions. Given low front-end implied volatility, holding gamma via options around the event may offer relative value.

In the gold market, data shows positioning has turned net short across various metrics. If the Fed signals a neutral or dovish stance and the Iran deal proceeds smoothly, gold could see a short-covering bounce. Positioning for upside risk via risk reversals is suggested.

The Iran Deal: Warsh's 'Cushion' and Key Tail Risk

The easing of US-Iran tensions is the most critical macro background variable for this meeting. During the peak of the conflict, surging energy prices pushed markets to fully price in a rate hike this year. As a negotiation framework took shape, Brent crude has retreated significantly from its peak—providing Warsh with ample justification to characterize recent inflationary shocks as temporary supply-side events, offering political and logical support for a "wait-and-see" stance. However, a warning is issued that if the deal process hits snags, previously cooled rate hike expectations could quickly rebound.

Under the baseline forecast, the Fed will hold rates steady throughout 2026, with the final two cuts pushed to 2027. The probability-weighted Fed path remains significantly more dovish than current market pricing, mainly due to skepticism about a hike scenario. The report states plainly: "Trump appointed Warsh for rate cuts, not hikes, and Warsh knows this." This doesn't mean he will act rashly at his first meeting but reflects his own caution regarding hikes. The most likely outcome for Warsh's debut is "no bombshell"—but the wrong phrasing could always light the fuse.