Climbing Up the Learning Curve

The Federal Reserve is likely to retain a hawkish stance and raise rates again in 2026, while Chair Kevin Warsh is expected to rely more on markets and less on forward guidance.

• Less than five months into Warsh’s tenure, Mellon expects the Fed to raise rates at least once more this year and to avoid signaling its October decision in advance.
• Warsh has said that “Forward guidance is not the business we should be in,” reflecting a preference for learning from market prices rather than attempting to lead investor expectations.
• With the labor market roughly in balance, policy depends mainly on inflation’s distance from the Fed’s 2% goal; when inflation is close to target, market participants’ views can help determine the appropriate stance.
• Warsh also appears less concerned with high-frequency data, arguing that “Trends matter. Data points are noisy,” while remaining comfortable with gradual 25-basis-point adjustments.
• The timing of action is less certain because Warsh has questioned the number of scheduled FOMC meetings: although “Four is not enough,” he has suggested that eight may be too many, potentially favoring a December move over October.

Takeaway: Investors should expect forceful messaging on restoring price stability and a further rate increase this year, but should not assume a predictable meeting-by-meeting path because Warsh may defer action and avoid forward guidance.