Inflation at the top, AI bubbles followed-media survey reveals dual risks of Warsh taking over

On Wednesday (June 17), during the Asian session, the US dollar index fluctuated in a narrow range and is currently trading around 99.50.

Behind the cautious trading of the dollar is the nervous waiting of investors for the Federal Reserve's policy signals.

Kevin Walsh's Federal Reserve is widely expected to make no changes to interest rates until 2027, according to media surveys. However, as many as 88 per cent of respondents expect this week's meeting to remove the easing bias in the statement - language that had previously suggested the Fed's next move could be a rate cut.

The survey of 32 respondents, including economists, fund managers and strategists, also showed broad support for Mr. Warsh's claim that the Fed should communicate less.

Interest rate path: consensus by 2027

In high anticipation, Kevin Walsh will chair the meeting as Federal Reserve chairperson for the first time, but according to the latest Fed survey conducted by the media, the market does not expect him to take significant action at least in the short term.

Thirty-two respondents - including economists, fund managers and strategists - as a group did not expect a change in interest rates at this meeting and at all meetings until 2027. But 88 per cent expected the Fed to remove the easing bias from its statement at this week's meeting - a phrase that had signalled to markets that "the next step could be a rate cut".

Warsh was personally nominated by a president who for years pressured the Federal Reserve to cut interest rates. However, high inflation - fueled in part by President Trump's tariff policies and the war on Iran - has temporarily removed the rate cut option and pushed it out of the forecast horizon of surveys and the federal funds market futures.

Inside the FOMC: Walsh is dovish, but the committee has turned hawkish

Gregory Daco, chief economist at Ernest & Young, said: "While Warsh is widely seen as a dovish, the committee he takes over has become significantly more hawkish. Several policymakers have recently argued that raising interest rates should remain an option if inflation continues to exceed target, and concerns about energy-driven inflationary pressures will only reinforce this tendency."

Mr. Warsh himself has said interest rates could move lower, but he has not said whether his outlook has changed in the wake of the recent surge in inflation and stronger employment data. The announcement of a potential US-Iran peace deal, which came after the survey, could give Mr. Warsh the flexibility to cut rates sooner than currently expected. For now, respondents do not expect high oil prices to prompt the Fed to raise rates, but expect the federal funds rate to remain unchanged from its current level of 3.62 per cent until 2027.

According to people familiar with the matter, because of President Trump's trust in him, he will have more autonomy in interest rate decisions.

Economic Outlook: Resilience Remains, Recession Risk Declines

On the positive side, surveys show that the US economy Mr. Warsh inherited is resilient to recent shocks and is expected to remain so, with forecasters raising their growth outlook, cutting the probability of a recession to 25 per cent from 33 per cent in April and lowering their expectations for the unemployment rate.

Economist Hugh Johnson wrote in the survey: "Improving economic conditions and employment conditions, as well as modest gains in equity prices, are common features of the current phase of the stock market-economy-interest rate cycle. Early warning signs that the bull market is ending the recession have yet to materialize."

The outlook for US GDP rebounded to 2.2% this year (up by 0.25 percentage points) and 2.3% next year, both recovering most of the downgrades suffered in the previous survey due to the Iran conflict. The unemployment rate for this year and next is expected to remain largely unchanged at the current 4.3% level.

Policy differences: Some respondents are calling for interest rate hikes to contain inflation

Several respondents said the healthy outlook for the jobs market should prompt the Fed to shift its focus to its mandated inflation target, which has been missed for much of the past six years.

John Ryding, chief economic adviser at Brean Capital, said: "The FOMC should raise interest rates to nip rising inflation expectations in the bud and move policy closer to neutral."

Guy LeBas, chief fixed income strategist at Janney Montgomery Scott, added: "The short-term labor market fragility has passed, making the shortcomings of the central bank's mandate on the inflation side more pronounced than on the other."

Wash's philosophy is widely supported: talk less, do away with dot plots?

Although interest rate cuts were not well-received among respondents, Warsh's idea of reforming the way the Federal Reserve communicates was widely shared.

Fifty-nine per cent of respondents thought Fed officials talked too much, compared with 38 per cent who thought the amount of communication was just right - generally supporting Mr. Warsh's "talk less" claim.

However, 59 per cent of respondents expected Warsh to hold a press conference after each meeting - something he did not commit to during his Senate confirmation hearing in April.

When it came to dot plots - officials' expected record of the federal funds rate over the next few years - 53 per cent of respondents said they should be abolished altogether. Most proposals to reform them - including releasing them days after the meeting or linking them to individual members' specific economic forecasts - were rejected by a majority.

Market risk: Inflation tops, AI bubble follows

Although inflation is seen as the number one risk to economic growth, the bursting of the AI bubble ranks second by a narrow margin.

A whopping 84% of respondents believe artificial intelligence stocks are overvalued, although this is down 6 percentage points from December. Respondents on average believe AI stocks are overvalued by about 21%. Meanwhile, 69% of respondents believe overall stocks are overvalued, the lowest level in a year.

Drew Matus, chief market strategist at MetLife Investment Management, said: "The gap between AI reality and belief is a risk to the stock market and consumers who rely on stock market returns. Wealth effects could be an important transmission channel for the next economic downturn."

Credit market risk is cooling

At the same time, concerns about credit market risk have declined. Only 53 per cent of respondents now see systemic risk in credit markets as "slightly elevated", compared with 75 per cent in March, when concerns about private credit issues intensified, and a further 3 per cent saw risk as "extremely high".

John Donaldson, head of fixed income at Haverford Trust, said: "Despite some pessimistic forecasts, we don't see a broad threat to credit markets. Any weakness is limited to CCC and CC-rated credit. Credit spreads in the financials sector, which is usually the first sign of trouble, are not showing any pressure at all."

Although there is no systemic threat in the credit market, the technical chart of the US dollar index points to the continuation of short-term pullback pressure. According to the daily chart of the US dollar index, a strong pressure level is formed at 100.30 above, and the short-term bulls are weak to counterattack. The key to the market depends on the gains and losses near this week's low of 99.38. If the support is maintained, it will maintain a high level of volatility; if it effectively falls below,GTCforeign exchangeThen further test the low support of the 98.75 stage down. The overall trend is too long in the medium term, and is in the technical pullback stage after the rise in the short term.

(Dollar index daily chart, source: Internet)

At 13:48 on June 17, Beijing time, the US dollar index was trading at 99.50.