Market attention is turning to the upcoming Federal Reserve policy meeting, with expectations for no immediate change in rates but a focus on Chair Kevin Warsh's debut and the post-meeting statement.

Castle Securities indicates the probability is increasing for the Federal Reserve to initiate a series of interest rate hikes starting as early as September, as inflation becomes more persistent and broad-based.

Frank Flight, the firm's Head of Macro Strategy, wrote in a client report that inflationary pressures have become increasingly entrenched during the war period, even as oil prices retreated following announcements by the U.S. and Iran of an interim peace agreement to end the conflict.

He stated that a combination of loose financial conditions, ongoing supply chain disruptions, re-accelerating labor market growth, and a surge in artificial intelligence investment are collectively contributing to sustained price pressures.

Against this backdrop, Flight forecasts that Fed Chair Kevin Warsh, at his first policy meeting on Wednesday, is likely to adopt a more hawkish stance, elevating the risk of rate hikes in September, December, and March 2027. This expectation is far more aggressive than current market pricing, with interest rate swap contracts implying only about a one-third chance of a September hike.

"The evidence suggests policy should move in a distinctly hawkish direction, and we believe Warsh will choose to defend credibility on inflation rather than validate the market's prior dovish expectations," Flight wrote.

Flight anticipates policymakers will release a set of more hawkish projections at the Wednesday meeting to support future rate increases. He noted that at least five officials are likely to forecast rate hikes, alongside predictions for core inflation above 3% in 2026 and a slightly lower unemployment rate.

Flight stated that, according to the Taylor Rule framework which links interest rate policy to inflation and unemployment, this combination of forecasts suggests the "optimal" policy path for this year would involve hiking rates by approximately 75 basis points. He also mentioned the Fed could pivot to a tightening bias as early as July, paving the way for a September rate hike.