Today the Federal Reserve Committee (Fed) will meet in the US to determine the trajectory of US interest rates. It is one of the key drivers we look at on a global basis to determine what will happen to investment and asset markets.
The meeting is also notable as it will be Kevin Warsh’s first Fed meeting. Warsh was recently sworn in to succeed Jerome Powell as chair of the Board of Governors of the Federal Reserve System. Warsh, who is 56 years old, will be starting his 14-year term as governor, which expires in 2040. His appointment could reshape the institution in a number of ways. Firstly, we have seen a lot of political pressure from the Trump administration for him to reduce interest rates, and that is something we will be watching. Secondly, he is also quite close to US Treasury Secretary Scott Bessent, and this could reinforce coordination between the Fed and the US Treasury.
Most recently, we have seen inflation in the US ticking up, well above the Fed’s long-term mandate to keep inflation below 2%. We believe this is being driven more by supply shocks from the Iran invasion rather than strong demand in the US economy, although the job market and broader economy have also been strong and supported by the AI build out.
Our expectation is for the Fed to leave rates unchanged at this stage, and that really needs to be viewed in the context of global geopolitical competition rather than cooperation. Bringing inflation back to 2% is far from the US administration’s top priority at this stage.
US policymakers cannot afford inflation to remain above 3% for too long. However, we think the broader objective is to support the rebalancing of the US economy away from the large deficits they are running and towards greater US strategic autonomy. The US is currently running very high debt-to-GDP ratios and deficits at the moment, but historically, keeping real interest rates low has been one of the most powerful and common mechanisms for reducing a country’s debt-to-GDP ratio over time. It simply erodes the real value of debt faster than the economy grows.
We therefore believe that, over the longer term, the Fed may be pursuing that objective alongside, rather than instead of, price stability.
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