Pre Fed Policy Perspective by Nachiketa Sawrikar, Fund Manager, Artha Bharat Global Multiplier Fund

Recent US economic data suggests that growth remains robust. The labor market continues to be stable and is not showing meaningful signs of weakening. At the same time, both month-over-month and year-over-year inflation measures have moved higher. Given these mixed signals, the US Federal Reserve is widely expected to leave interest rates unchanged at this week’s FOMC meeting as policymakers remain in a wait-and-see mode.Since the March meeting, the prolonged disruption in the Strait of Hormuz has kept energy prices elevated, increasing the risk that inflation remains above the Fed’s comfort zone for longer than previously anticipated. While core inflation has shown some moderation, higher energy costs could delay the path back toward the Fed’s 2% inflation objective. That said, the recent decline in oil prices following the new Iran agreement has reduced pressure on the Federal Reserve to alter its current easing bias. It also provides incoming Chairman Kevin Warsh with some breathing room as he assumes leadership of the Fed. Without the recent moderation in oil prices, the Committee may have been forced to shift its policy outlook from an easing bias toward a more neutral stance.Overall, we expect Kevin Warsh to maintain broad policy continuity in the near term. Establishing credibility as the new Fed Chair will likely require maintaining a disciplined inflation-fighting stance while preserving policy flexibility. We expect him to emphasize that a rate cut remains possible later this year, provided inflation continues to moderate alongside lower energy prices. Markets are likely to view Warsh’s first meeting positively, as it should reinforce continuity while preserving the possibility of future policy easing.