An analyst from Natixis has presented a core view that inflation will be the Federal Reserve's primary focus for the remainder of 2026, but monetary policy is highly likely to keep interest rates unchanged for the full year.
The new Fed Chair, Kevin Warsh, has sent strong hawkish signals on fighting inflation since taking office, while abandoning forward guidance and refusing to participate in dot-plot forecasts, creating operational constraints from his own policy statements. Beyond this, the United States' unpredictable trade and sanctions policies are eroding the appeal of the US dollar as a reserve currency, compounded by geopolitical influences, leading central banks worldwide to persistently increase their gold allocations and reshape the global reserve asset landscape.
Inflation Analysis and the Fed's Likely Wait-and-See Stance
The analyst indicated that the Fed's policy focus is clearly tilted towards price stability, with the US having failed to meet its 2% inflation target for five years, while tariffs and energy shocks continue to push prices higher. The central bank needs to distinguish between one-off external shocks and domestic, endogenous inflationary momentum. Housing, which accounts for 35% of the CPI weight, is expected to show continued cooling in subsequent data. Wage growth, which drives core services inflation, remains at 3% to 3.5%, aligning with a balanced inflation level, suggesting that endogenous price pressures are not heating up.
In this data environment, the analyst believes the Fed's optimal choice is to extend the pause cycle to fully observe the complete transmission path of external oil price shocks into core prices. Therefore, it is forecast that the benchmark interest rate will not be adjusted throughout 2026. Short-term fluctuations in monthly inflation data do not hold sustained reference value; only consecutive periods of higher-than-expected readings would force the central bank to reassess the option of raising rates.
Warsh's Hawkish Stance Creates Policy Dilemma, Downplaying Guidance Fits Current Climate
Regarding Warsh's abandonment of forward guidance and refusal to provide dot-plot rate expectations, the analyst stated this move is suited to the current highly uncertain economic environment, with most officials also acknowledging that guidance tools are of limited use at this stage. However, the analyst raised a key concern: Warsh used extremely strong language to emphasize his commitment to fighting inflation in his first policy meeting as Chair, and such an overly rigid stance could compress future policy flexibility. If subsequent inflation data continues to rise, markets would pressure the Fed to implement rate hikes based on his prior hawkish remarks, potentially trapping it in a credibility dilemma.
While some external views suggest Warsh may be deliberately issuing hawkish comments to demonstrate policy independence to the President, the analyst's assessment is that Warsh's career-long stance has generally been biased towards tightening, with only brief periods of moderate views during his two previous campaigns for the Fed Chair nomination. His current tough stance is more a return to his inherent policy position rather than a deliberate attempt to appease or confront presidential demands. Following the June policy meeting, several economic indicators have weakened, further reducing the likelihood of a rate hike this year.
US Policies Weaken Dollar Reserve Demand, Gold Becomes Core Choice for Global Diversification
Discussing changes in global central bank reserve allocations, the analyst noted that the Russia-Ukraine conflict was the starting point for countries' gold-buying cycles, and the United States' repeatedly shifting trade and sanctions policies continue to accelerate this trend. Central banks are not engaging in large-scale sales of US dollar assets but are rather halting reinvestment in them, passively reducing their dollar exposure. Although the vitality of the US private market continues to provide underlying support for the dollar, willingness to allocate to the dollar at the sovereign reserve level is persistently weakening.
To hedge against the policy uncertainty surrounding US dollar assets, many central banks are continuously increasing their gold holdings. The status of gold in official reserves is steadily rising. The various restrictive policies enacted by the US itself are indirectly accelerating the diversification of the global reserve system.
Conclusion
Overall, current domestic inflationary pressures in the US are moderate, and external energy disturbances appear to be temporary. The Federal Reserve is highly likely to keep interest rates unchanged throughout 2026. While Warsh's insistence on a hawkish anti-inflation tone and a communication framework that downplays forward guidance fits the current economic reality, it also creates constraints for his own room to adjust policy.
Globally, US policy uncertainty continues to reduce central banks' willingness to allocate to the US dollar. Gold, as a non-sovereign-risk asset, has solid support for long-term buying demand, persistently reshaping the global foreign exchange reserve landscape.
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