QNB expects the US Federal Reserve to adopt a more restrictive monetary policy approach under its new Chair Kevin Warsh, with future interest rate decisions likely to remain dependent on economic data amid continued inflationary pressures and rising inflation expectations.
In its weekly report, QNB said inflation remaining above the 2% target, along with repeated warnings from Federal Reserve officials over upside risks to prices, has increased the likelihood of further monetary tightening. The bank said this makes interest rate hikes the more likely option in the coming period.
The report said markets now expect a 25-basis-point interest rate increase by the end of the year, which would raise the key policy rate to 4.00%. It also pointed to a strong possibility of another increase during the first quarter of next year.
QNB noted that the outlook for US monetary policy has changed significantly in recent months. At the beginning of the year, expectations had pointed to a gradual easing cycle amid stable growth and moderating inflation. However, the escalation in the Middle East and the resulting rise in energy prices disrupted that path.
The report explained that the sharp increase in energy prices following the regional escalation changed the direction of inflation, adding to price pressures at a time when core goods prices were already showing some persistence.
As a result, consensus inflation expectations for this year rose significantly, from around 2.6% before the escalation to about 3.5% in the latest estimates.
QNB said the return of inflationary pressures and the rise in price growth above the Federal Reserve’s 2% target led markets to reassess the expected direction of monetary policy. Inflation in the United States rose to around 4% as energy prices increased, nearly double the Fed’s target, reflecting renewed price pressures.
The report added that the appointment of Kevin Warsh as Chair of the Federal Reserve has strengthened the focus on restoring price stability. His first monetary policy meeting and public remarks showed a clear priority on fighting inflation, with less emphasis on labour market risks.
QNB noted that while the Federal Reserve operates under a dual mandate of price stability and maximum employment, its latest policy meeting showed a clear focus on inflation risks. Warsh’s first press conference confirmed this direction, as he stressed that inflation remains well above the 2% target and placed price stability at the top of monetary policy priorities.
By contrast, labour market conditions received relatively limited attention, reflecting the view that employment levels remain largely resilient.
The bank said this shift also reflects the direction of the Federal Open Market Committee, as policymakers raised their inflation projections and moved from expectations of interest rate cuts to signalling a greater possibility of further monetary tightening.
QNB said the Fed’s tightening bias is not only linked to current inflation levels, but also reflects the need to preserve the credibility of monetary policy in achieving price stability.
The report noted that the Fed Chair acknowledged inflation had remained above target for more than five years, highlighting the challenges faced by the institution in containing it. This, QNB said, strengthens the case for keeping monetary conditions tight for a longer period.
The report concluded that these developments have led to a sharp shift in market expectations for official interest rates. Earlier in the year, investors had expected a gradual easing cycle as inflation moved closer to target, but the return of inflationary pressures and the Fed’s more hawkish tone changed those expectations.
Markets have now moved from expecting interest rate cuts to anticipating continued monetary tightening, reflecting a growing belief that monetary policy will remain restrictive for longer than previously expected.
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