New Fed Chair changes the conversation

Key takeaways

• Kevin Warsh's first Fed meeting signals a shift in communication and policy tone
• The Bank of Japan and RBA continue to follow different policy paths
• China's soft economic data increases the likelihood of further stimulus

The Federal Reserve was the focal point for markets this week, as Kevin Warsh chaired his first policy meeting.

While the Fed left rates unchanged, investors were surprised by the hawkish shift in tone. Updated policy projections revealed a growing divide among policymakers, with views now split between keeping rates on hold and potentially raising rates later this year.

Perhaps more notable was the change in communication style.

Warsh has long argued that central banks should provide less forward guidance, and this philosophy was evident throughout the meeting. Both the policy statement and press conference offered fewer clues about the future path of rates than markets have become accustomed to receiving.

Despite the more hawkish messaging, our base case remains that the Fed will stay on hold through the remainder of 2026.

The U.S. economy continues to prove resilient, even after navigating higher energy prices and supply chain disruptions linked to the Middle East conflict. At the same time, underlying inflation pressures remain relatively contained, with wage growth and housing inflation showing little evidence of renewed acceleration.

Taken together, we believe the economic backdrop supports a prolonged pause rather than additional tightening.

Elsewhere, central banks continued to chart different paths.

The Bank of Japan raised rates to 1%, marking the first time in three decades that policy rates have reached that level. However, policymakers continue to signal a gradual approach to normalization, and we expect at most one additional rate increase over the next year.

In Australia, the Reserve Bank of Australia held rates steady after three rate hikes earlier this year. Signs of softer consumer spending, weaker confidence and a cooling labor market have led investors to significantly reduce expectations for further tightening.

This divergence highlights how economic conditions remain highly regional, even as central banks continue to focus on inflation and growth.

China's latest economic data pointed to ongoing weakness across the economy.

Retail spending remained subdued, reflecting cautious consumers, weak housing markets and sluggish income growth. Fixed asset investment also softened during the month.

These conditions increase the likelihood that policymakers will provide additional infrastructure stimulus during the second half of 2026 in an effort to support growth.

While China's economy remains under pressure, further fiscal support could help stabilize activity and move growth closer to the government's target.

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