Fed preview: Economist expects Fed rate hold, but says a hike is 'no longer unthinkable'

The time for speculation about what the Kevin Warsh-led Federal Reserve will look like is almost over. By Wednesday afternoon, we’ll have our first look at how the new chair will approach his role at the central bank compared to his predecessor, Jerome Powell.

The Federal Open Market Committee convenes Tuesday and Wednesday for its June meeting, with the backdrop of a new Fed chair, a Middle East conflict potentially wrapping up, higher energy prices leading to higher inflation, and a White House hoping to deliver rate cuts in time for the midterm election.

Warsh has signaled an interest in rethinking how the Fed interprets economic data, a departure from the framework Powell built over eight years. Powell remains on the board of governors, which adds an unusual layer of institutional tension to the transition.

It is a challenging task awaiting Warsh as he embarks on his mission to rethink monetary policy. One veteran economist said the first move will likely be to wait and see.

Odeta Kushi, deputy chief economist at First American in Washington, D.C., said she expects the central bank to hold rates on Wednesday.

"My baseline expectation is a hold," Kushi told Mortgage Professional America. "Inflation has moved higher, but much of the recent acceleration has been driven by energy prices, while the labor market is showing signs of stabilizing. The Fed doesn't need to rush into rate cuts, but it also doesn't have enough evidence yet to justify a hike.

“The key question is whether the recent inflation shock proves temporary or begins to spill over into broader prices and inflation expectations. Until that becomes clearer, holding is the path of least regret."

Rate hike ‘no longer unthinkable’

The holding pattern has been in place for several months. Kushi said the more pressing question now is not how long it continues but whether the next move goes in a direction markets did not expect at the start of the year.

"A rate hike is not inevitable, but it's no longer unthinkable," she said. "Earlier this year, the market's base case was that the Fed would be cutting rates. Today, the conversation has shifted toward how long rates may need to remain elevated and whether inflation risks could eventually require a different policy response."

Traditional monetary policy, Kushi said, argues for looking through supply-driven energy shocks. But the longer elevated energy prices persist, the greater the risk they become embedded more broadly in the economy.

"If inflation remains concentrated in energy and core inflation stays relatively contained, the Fed can remain patient," she said. "If higher energy costs begin feeding into transportation, goods, services, and inflation expectations, the conversation changes."

Whether the resolution in the Middle East holds and energy prices retreat is a variable outside the Fed's control, and Kushi said the timeline on that is uncertain.

A closely watched press conference

Kushi said the press conference may carry more weight than the rate decision itself. Warsh arrives with a different philosophy from Powell, and markets will be parsing his words carefully for what that means in practice.

"Beyond the policy decision itself, I'll be paying close attention to the framework Chairman Warsh uses to interpret the data," she said. "Every Fed chair inherits inflation, labor market, and growth data. What matters is how they think about uncertainty, risk management, and the tradeoffs within the dual mandate."

Kushi said she will be listening to how Warsh defines his reaction function and how he balances inflation risks against labor market risks when the data is pulling in different directions.

"I'll be listening for signals about his reaction function," she said. "The first meeting is often about establishing a framework for how policy decisions will be made going forward."

For mortgage brokers, Kushi said the second half of 2026 is more likely to bring volatility than clarity. Mortgage rates, she said, are driven less by the federal funds rate and more by inflation expectations and long-term bond yields.

"The more likely story for the second half of the year is volatility around a higher-for-longer range, rather than a meaningful decline in mortgage rates," she said. "If inflation remains sticky and investors continue to demand compensation for inflation risk, mortgage rates may stay elevated."

However, one silver lining is that despite the rate volatility, Kushi said housing demand is still strong, even if some buyers are holding off until the market settles down a bit.

"For housing, the encouraging news is that demand appears delayed, rather than destroyed," she said. "Inventory has improved from last year's levels, the labor market seems to be showing signs of stabilization, and sales have shown signs of life, despite elevated rates. If affordability continues to improve, there is still substantial pent-up demand waiting on the sidelines."

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