Kevin Warsh's first Fed meeting could be more about communication than rates

Federal Reserve Chair Kevin Warsh is heading the central bank's two-day policy meeting, concluding this afternoon, with investors looking beyond the interest-rate decision itself for clues about how he plans to reshape the central bank.

Markets are fully expecting the Fed to leave its benchmark fed funds rate range unchanged at 3.50%-3.75%.

Bank of America (BAC), however, expects Warsh and the rest of the Fed to adopt a more hawkish tone, reflecting stronger-than-expected economic data and persistent inflation pressures.

The bank forecasts that policymakers will remove language suggesting a bias toward future rate cuts and upgrade their assessment of the labor market after recent payroll reports surprised to the upside. Markets are well ahead of that assessment, having priced in very high chances of one or more rate hikes this year.

But the bigger story may be Warsh himself.

For years, Warsh has argued that the Fed has become too reliant on forecasts, speeches and forward guidance. According to a Wall Street Journal profile published Sunday, Warsh's advice to the central bank last year was simple: "Stop talking so much. More thinking, less talking."

That philosophy could influence Wednesday's meeting. Bank of America (BAC) said there is a chance Warsh declines to submit his own projections to the Fed's Summary of Economic Projections, or SEP, a move that would highlight his long-standing criticism of the central bank's forecasting process.

"If you're not very good at something, you should do less of it," Warsh said at a State Street conference last year, according to the Journal. "These forecasts have been abysmal. My dots wouldn't be perfect either, so I wouldn't give them."

The SEP's "dot plot," which shows where policymakers expect interest rates to move, has become one of the most closely watched pieces of Fed communication. Bank of America (BAC), in line with the market, expects this week's projections to show rates remaining unchanged through 2026 before modest cuts in 2027 and 2028.

The investment bank also expects policymakers to acknowledge rising inflation risks while signaling a lower willingness to look through price shocks than in recent years.

Warsh's first press conference as chair is likely to attract the most scrutiny. Bank of America (BAC) expects him to strike a patient tone, arguing that recent inflation pressures linked to geopolitical events, such as the conflict involving Iran, may prove temporary, while avoiding any signal that rate cuts are imminent.

Markets remain divided over whether Warsh will ultimately prove more dovish or hawkish than his predecessor, Jerome Powell. According to Bank of America (BAC), that uncertainty creates the biggest risk for investors.

A chair who sounds more hawkish than expected could strengthen the dollar and pressure stocks and bonds. But an equally important question may be whether Warsh uses his first meeting to begin a broader effort to change how the Fed communicates with markets after years of unprecedented transparency.

Bitcoin (BTC), down about 25% year-to-date, is lower since Warsh took office on May 22nd as the U.S.-Iran conflict continues to overshadow domestic economic policy.