DWS Chief US Economist Christian Scherrmann stated that, as expected, the Federal Reserve kept its policy rate unchanged, although the decision was not unanimous, with Governor Michelle Bowman voting in favor of a 25 basis point rate cut. DWS continues to believe that the Fed will ultimately lower interest rates further toward a neutral level, although markets may need to wait some time before seeing this occur.
The FOMC press release emphasized the additional uncertainty stemming from escalating tensions in the Middle East. According to updated projections, the Fed expects rising oil prices to primarily impact headline inflation, while also exerting some effect on core inflation—though this impact is not anticipated to materialize until 2026. Fed Chair Jerome Powell later clarified that tariff effects also contributed to these adjustments.
Economic growth is projected to strengthen slightly in 2026, a particularly noteworthy outcome given the potential impact of higher oil prices and a downward revision to growth momentum in 2025. Despite rising inflation and stronger growth, the dot plot still indicates one rate cut in 2026.
During the press conference, Powell largely adhered to the textbook central bank response to energy shocks. He emphasized that inflation expectations remain well anchored and signaled that the Fed plans to look through the effects of rising energy prices. The focus will instead be on tariff-related price pressures, particularly goods inflation. While acknowledging that inflation could rise in the near term, Powell appeared optimistic that the impact of tariffs would begin to fade by mid-2026. He further stated that this remains a key condition for rate cuts, and that the labor market will determine the extent of eventual monetary easing.
On the topic of neutral interest rates, Powell reiterated that current rates are at the upper end of the neutral range. He also surprisingly commented publicly on succession plans, indicating that if a successor has not been confirmed, he will continue to serve as interim chair and remain on the board until the conclusion of the Justice Department investigation.
Overall, DWS noted that the guiding principle for monetary policy remains the evolution of inflation expectations and the factors influencing their trajectory. Central bankers currently appear quite confident in this regard. Persistent tariff-driven inflation and the impending effects of rising energy prices make this stance appear bold, perhaps reminiscent of past periods of complacency. History shows that central bank credibility is key to anchoring inflation expectations, which may explain Powell’s unexpectedly confident indication that he plans to remain in his role for some time.