Kevin Warsh’s Fed is not expected to make any change to rates for a while, according to CNBC Fed Survey
Amid growing expectations, Kevin Warsh will chair his first meeting as Federal Reserve chairman but is expected to do little, at least initially, according to the latest CNBC Fed Survey.
The 32 participants, including economists, fund managers and strategists, as a group, do not see a change in interest rates at this meeting or any meeting until 2027. However, 88% expect the Fed to eliminate the easing bias in its statement at this week’s meeting, indicating that the Fed’s next move will likely be a rate cut.
Warsh arrives as the hand-picked nominee of a president who has been bullying the Fed for lower interest rates for years. But high inflation spurred in part by President Donald Trump’s tariffs and his war with Iran have taken those cuts off the table for now, pushing them off the forecast horizon for the Fed Survey and Fed fund futures markets.
“While Warsh is widely perceived as dovish, he will inherit a committee that has become increasingly hawkish,” said Gregory Daco, chief economist at EY. “Recently, many policymakers have argued that rate hikes should remain an option if inflation remains above target, and concerns about energy-driven inflationary pressures have only strengthened this bias.”
Warsh said rates could be lower, but did not say whether his outlook had changed given the recent rise in inflation and strengthening employment numbers. Announcing a possible deal with Iran after the survey is conducted could give Warsh the flexibility to cut rates sooner than currently expected. Currently, participants do not believe that higher oil prices will lead the Fed to raise interest rates, but they see the funds rate essentially unchanged from its current 3.62% level through 2027.
A person familiar told CNBC that Warsh will have more breathing room to decide Trump’s interest rates because the president trusts him.
On the positive side, the poll shows Warsh taking charge of an economy that is resilient to recent shocks and is expected to remain that way. Forecasters upgraded their growth outlook, lowered the likelihood of a recession to 25% from 33% in April, and lowered their expectations for the unemployment rate.
Economist Hugh Johnson writes: “Improving economic and employment conditions and a modest rise in stock prices are common features of the current phase of the stock market-economic-interest rate cycle. Early warning signs of the end of the bull market have not yet emerged.”
The U.S. GDP outlook increased to 2.2% for this year, a quarter-point increase for 2026, and 2.3% for next year. Both recovered much of the downgrade seen in the previous survey linked to hostilities with Iran. The unemployment rate for this year and next year is expected to remain largely unchanged from its current level of 4.3%.
Many participants said the outlook for a healthy labor market should lead the Fed to focus on the inflation side of its mandate, which it has overlooked for most of the past six years.
“The FOMC needs to raise rates to nip rising inflation expectations in the bud and move closer to neutral policy,” said John Ryding, chief economic advisor at Brean Capital.
Guy LeBas, chief fixed income strategist at Janney Montgomery Scott, added: “The era of short-term labor market fragility has passed, and the central bank’s mandate remains clearly shorter on one side than the other.”
Support for Warsh’s ideas
While lower rates have little support among participants, Warsh’s ideas for changes to the Fed’s communications are gaining support. 59 percent believe Fed officials talk too much, while 38 percent say it’s the right amount. This generally supports Warsh’s call for less talk from the Fed. But 59 percent of respondents expect Warsh to hold press conferences after every meeting; That’s something Warsh won’t commit to during his Senate confirmation hearing in April.
As for the dot chart where officials write their expectations for funds rates in the coming years, 53% believe it should be eliminated entirely. Most ideas to change this – including publishing days after the meeting or linking the points to specific economic forecasts of individual members – were rejected by a majority of attendees.
Although inflation is seen as the number 1 risk to growth, the bursting of the artificial intelligence bubble comes in second place. A significant majority of 84 percent think AI stocks are overvalued, but this is down 6 percentage points from December. The average respondent thinks AI shares are overvalued by about 21%. Meanwhile, 69% said stocks were generally overpriced and were at their lowest level this year.
“Belief in the reality of AI is a risk for the stock market and for consumers who are addicted to stock market returns,” said Drew Matus, chief market strategist at MetLife Investment Management. “The wealth effect is the likely conduit for the next crisis.”
These concerns about AI reflect a generally muted outlook for stocks; The S&P 500 is only expected to approach 8,000 by 2027; This represents an increase of approximately 5.5% from current levels.
Meanwhile, participants are less concerned about credit market risk. Only 53% now view the level of systemic risk in credit markets as “somewhat high.” In March, the level reached 75%, at a time when concerns were growing about problems with private loans; an additional 3% said the risks were “extremely high.”
“Despite some dire forecasts, we don’t see a widespread threat to credit markets,” said John Donaldson, director of fixed income at Haverford Trust Co. “Any weakness is limited to CCC and CC credits. … Absolutely nothing in financial credit spreads shows any pressure and that sector is usually the first to show concerns.”
See full survey results Here.
