Federal Reserve Vice Chair Philip Jefferson stated that he expects inflation to cool later this year as the effects of rising tariffs and energy costs gradually subside, though he warned that inflation risks remain tilted to the upside. According to the text of a speech he is scheduled to deliver Thursday morning at a Bank of Japan-hosted conference in Tokyo, Jefferson said he is closely monitoring whether rising energy costs due to the war in Iran are dragging on consumer spending. He also warned that he continues to see signs of a weakening labor market. Jefferson reiterated his view that the central bank's current policy setting is well positioned to respond to any developments. At last month's meeting, Fed officials held the benchmark interest rate steady in the range of 3.5% to 3.75%. Jefferson said, "I believe this policy stance leaves us well positioned to respond to developments based on incoming data, the evolving outlook, and the balance of risks." "I am not making a pre-judgment about the next meeting and look forward to conferring with my colleagues about the policy that will best achieve our dual mandate objectives." The Federal Open Market Committee (FOMC) meeting on June 16-17 will be the first chaired by the new Fed Chair, Kevin Warsh. The new Fed chief faces an ultimate "stress test." The June 16-17 FOMC meeting will be the first chaired by new Fed Chair Kevin Warsh. With inflation climbing to a three-year high, unprecedented divisions within the FOMC intensifying, and sustained White House pressure for rate cuts, this meeting is not only the first test of Warsh's leadership but could also become a key juncture determining the Fed's policy direction for years to come. Most Wall Street analysts point out that Warsh's first chaired meeting will directly confront three intertwined core challenges: "geopolitical inflation, tariff shocks, and economic weakness." The Iran conflict re-ignites oil prices, causing a "resurgence" of supply-side inflation. Analysts widely believe the most intractable systemic risk currently stems from the Middle East. As the war in Iran enters its fourth month, the Strait of Hormuz, a global energy chokepoint, faces a dual blockade from Tehran and Washington. Despite market hopes for a short-term ceasefire, data from prediction market platform Kalshi shows traders are skeptical of a reconciliation agreement between the two countries, with Brent crude oil surging again to a high of $96 per barrel. Analyst views suggest: This war-induced surge in energy costs is a classic case of malignant supply-side inflation. The Fed's traditional interest rate hike tools are powerless against such supply-side shocks. If Warsh chooses to ignore rising oil prices, inflation expectations could spiral out of control and re-transmit across all sectors of the economy. However, choosing to hike rates to combat oil prices would be counterproductive, as it cannot increase oil supply and would instead further harm the real economy. Tariffs and trade barriers build walls, making it difficult to set a clear hawkish or dovish policy stance. Beyond the energy crisis, the transmission effects of tariff policy are a hidden bomb that Warsh must confront. Jefferson's mention in his speech that "the effects of tariffs will take time to subside" indirectly confirms that current trade policies are continuously raising import costs for goods and supply chain pressures for U.S. businesses. Analyst views suggest: Tariffs have the dual negative effects of "raising prices" and "suppressing economic vitality." On one hand, they add fuel to the inflation fire, forcing the Fed to maintain a "hawkish" stance at the current high interest rate level of 3.5% to 3.75%, and even necessitating signals of potential hikes. On the other hand, the damage tariffs inflict on cross-border trade raises economists' recession concerns. Finding balance amidst this policy-manufactured inflationary factor will severely test Warsh's political acumen and macroeconomic maneuvering skills. Weakening labor market, the dual mandate imbalance under the shadow of stagflation. The Fed's core mission is to maintain the dual balance of "price stability" and "maximum employment." However, current economic data are showing the early signs of "stagflation," which central banks fear most. Jefferson explicitly noted that he "continues to see signs of a weakening labor market," and that high energy costs are tangibly dragging on consumption. Analyst views suggest: The side effects of high interest rates are beginning to show, with the U.S. job market losing resilience. If Warsh chooses to continue hiking rates (or maintaining high rates for an extended period) to absolutely suppress inflation driven by oil and tariffs, the already fragile labor market could collapse more rapidly, pushing the U.S. economy directly into recession. Conversely, if he rushes to cut rates out of concern for employment, inflation could completely break its banks. Wall Street widely views the upcoming June meeting as a "stress test" for the Fed under Kevin Warsh's leadership. Synthesizing various analyses, the most likely outcome of the June meeting is to keep rates unchanged at 3.50%-3.75%, but the policy statement's wording may shift from a dovish bias to a neutral stance. The CME FedWatch Tool shows the market assigns over an 80% probability of rates holding steady in June and July, while the probability of a hike by December is close to 70%. Bank of America analysts even predict the Fed may not begin cutting rates until the second half of 2027. Warsh's real challenge lies in how to meticulously craft the wording of the policy statement—needing to demonstrate a hawkish resolve to fight inflation to calm bond markets, while also maintaining a dovish empathy for weak employment, carefully balancing the Fed's policy scales at the center of the storm. Warsh's first post-meeting press conference will be a key window for observing the policy orientation of the "Warsh era." He advocates for less forward guidance, downplaying communication tools like the "dot plot," and prefers a "meeting-by-meeting," data-dependent decision-making approach. This shift from "predictable forward guidance" to "data dependence per meeting" could increase market volatility, requiring investors to re-adapt to the Fed's communication style.
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