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US: Next Fed move a hike? Last week’s FOMC meeting to decide the course of US monetary policy was the last one under Chair Jerome Powell. He will not disappear from the scene entirely though, as he has expressed a desire to carry on as a member of the Fed Board of Governors through the expiration of his term at end-Jan 2028. With Powell legally allowed to be in the FOMC till then, and several other members in the 12-person FOMC aligned with his views, a contentious set of Fed meetings lie ahead. This is especially likely with even forthcoming Fed Chair Warsh and current Trump-appointee Miran expected to push hard for policy accommodation.
What sort of data will confront the next meeting’s deliberations? Consider the widely followed ISM purchasing managers’ survey: April readings reflect an economy still very much on the march, with markers for production, new orders, inventories, and imports pointing to sustained demand growth. The labour market may be on the weaker side, inflation may be soaring, but economic activity is proceeding apace. Double-digit retail sales growth in 1Q26 confirms this narrative. Atlanta Fed’s Nowcast points to 2Q26 GDP tracking at over 3%.
Strong consumer spending, a flat housing market, a decent investment cycle (though concentrated in tech), booming energy exports, and substantial upside inflation risks, driven by energy and electronics prices, characterise the US economy presently. These factors point to maintaining rates as they are, or could even justify moving into a hawkish stance in the coming months.
Short of a dramatic and concrete resolution to the ongoing Middle East conflict, US inflation risks are unlikely to recede in the coming months. It is conceivable that under Chair Warsh, the Fed will find a way to convince the markets that headline inflation risks should be looked through so long as core inflation markers are stable (which they were, through March). But even that shift to neutral will displease President Trump, while any talk of possible hikes could be met with major challenges to Fed independence by the president.
Once mid-term elections are over, there might be further clarity on the balance of power in Washington, which could then pave the way for more independent decision-making. While Warsh is likely to be reluctant to lead the Fed to a path of rate hikes, the data may force him in that direction. Assuming growth remains strong and price pressures don’t fade, 2027 could be marked by Fed rate hikes, in our view. As for our forecasts, we will remove the rate cut calls for this year but not venture yet into rate hike calls for next year. Like the Fed, we require more data over several months before heading in that direction.
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