Amidst heightened anticipation, Kevin Warsh to preside over his first meeting as Federal Reserve chairman, but is expected to do very little, at least initially, according to the latest CNBC Fed poll.
The 32 respondents, including economists, fund managers and strategists, see no rate changes at this meeting or at any meeting until 2027. But 88% expect the Fed to reverse its easing bias at this week’s meeting in a statement that signaled the Fed’s next move is likely to be tapering.
Warsh is a presidential candidate who has pushed for lower rates from the Fed for years. But high inflation, driven in part by President Donald Trump’s tariffs and the war with Iran, has for now removed those cuts and pushed them off the forecast horizon for the Fed review and Fed futures markets.
“While Warsh is generally perceived as dovish, he will inherit a committee that has become noticeably more hawkish,” said Gregory Dako, chief economist at EY. “Several policymakers have recently argued that rate hikes should remain an option if inflation remains above target, and concerns about energy-driven inflationary pressures have only added to that bias.”
Warsh himself said rates could be lower, but did not say whether his forecasts had changed amid the recent spike in inflation and job growth. The announcement of a potential deal with Iran, which came after the poll, could give Warsh an opportunity to cut rates earlier than expected. As of now, respondents do not believe that high oil prices will lead the Fed to hike, but do believe that the funds rate will remain virtually unchanged from its current level of 3.62% through 2027.
On the positive side, the survey shows Warsh taking the reins of an economy that has been resilient to recent shocks and is expected to remain so. Forecasters improved their growth forecast, lowered the likelihood of a recession from 33% in April to 25% and lowered expectations for the unemployment rate.
Economist Hugh Johnson writes: “Improving economic and employment conditions and modest growth in stock prices are common characteristics of the current stage of the stock market and economic interest rate cycle. There are no early signs that the bull market recession is over.”
The U.S. GDP forecast has rebounded to 2.2% this year, rising by a quarter point in 2026 and to 2.3% next year. Both have recovered most of their downgrades from a previous survey linked to military action with Iran. The unemployment rate this year and next is expected to remain virtually unchanged from the current level of 4.3%.
Several respondents said the outlook for a healthy labor market should prompt the Fed to focus on the inflationary side of its mandate, something it has not done for much of the past six years.
“The FOMC needs to raise rates to nip rising inflation expectations in the bud and move closer to policy neutral,” said John Riding, chief economic adviser at Brean Capital.
Guy Lebas, chief fixed income strategist at Janney Montgomery Scott, added: “The period of short-term volatility in the labor market has passed, leaving central bank authority more distinctly short on one side than the other.”
Support for Varsha’s ideas
While lower rates have little support among respondents, Warsh’s ideas about changes in the Fed’s communication have support. Fifty-nine percent think Fed officials are talking too much, compared to 38 percent who say it’s the right amount. This broadly supports Warsh’s call for less talk from the Fed. But 59% expect Warsh to hold press conferences after each meeting, something Warsh did not commit to doing at a Senate confirmation hearing in April.
And when it comes to the dot chart, where officials record their expectations for future fund rates, 53% think it should be eliminated altogether. Most ideas for changing it — including making it public a few days after the meeting or connecting the dots to specific economic forecasts from individual members — were rejected by most respondents.
While inflation is seen as the No. 1 risk to growth, the bursting AI bubble is a close second. A substantial majority of 84% believe that AI stocks are overvalued, although this is down six percentage points from December. The average respondent sees AI stocks as overvalued by about 21%. At the same time, 69% think stocks are generally overvalued, which is the lowest level in a year.
“The reality of artificial intelligence versus belief is a risk to the stock market and to consumers who depend on stock market returns,” said Drew Matus, chief market strategist at MetLife Investment Management. “The wealth effect is a likely channel for the next recession.”
These fears about AI reflect a generally subdued view of the outlook for stocks, with the S&P 500 not expected to approach 8,000 until 2027, a gain of about 5.5% from current levels.
Meanwhile, respondents are less concerned about credit market risk. Only 53% now consider the level of systemic risk in the credit markets to be “somewhat elevated”. In March, amid increasing concerns about private credit problems, the level reached 75% with a further 3% saying risk exposures were “very high”.
“Despite some dire forecasts, we don’t see widespread threats to credit markets,” said John Donaldson, director of fixed income at Haverford Trust Co.
See the full survey results here.