J.P. Morgan shifts to hawkish Fed rate forecast after Warsh's ambiguous remarks

Mary Helen Gillespie Fri, July 31, 2026 at 11:03 PM PDT | 5 min read

The latest data from the Federal Reserve's preferred inflation indicator came in lower than consensus in June, primarily due to a drop in energy prices.

However, during his second Fed Day as Chairman of the U.S. central bank, Kevin Warsh offered unclear signals on whether the Personal Consumption Expenditure (PCE) price index would continue to serve as the key inflation gauge — and provided no hint as to what the replacement might be.

This lack of transparent strategy frustrated Wall Street more than the Federal Open Market Committee's decisive 9-3 vote to hold short-term benchmark interest rates steady on July 29. Bonds sold off sharply, with the 30-year Treasury hitting 5.22%.

Within hours of Warsh's post-meeting press conference, J.P. Morgan abruptly shifted its forecast for the Fed's interest-rate outlook to a hawkish one. The headline on the note: "Talk is Cheap."

J.P. Morgan's Revised Forecast

J.P. Morgan Chief U.S. Economist Michael Feroli said the Fed would raise interest rates by 25 basis points in December instead of the second half of 2027.

The note to clients expects the Fed to continue to hold the Federal Funds Rate at 3.75%–4.00% after the December hike but added that the risk of a September rate increase is real.

Feroli's research update stated that Warsh's ambiguous signaling raises concerns about the central bank's inflation strategy.

"It's hard to know what to make of Warsh's remarks, which involved a lot of well-turned phrases but little in the way of a coherent macro view," Feroli wrote to clients.

He added that the new Chairman "once again failed to specify how he intended to achieve his stridently asserted inflation resolve," creating additional policy uncertainty for financial markets.

Fed's Mandate Balances Interest Rates, Jobs, and Prices

The Fed's congressional dual mandate requires full employment and price stability.

The FOMC post-meeting statement was a terse five paragraphs that described economic activity as "expanding at a solid pace despite elevated uncertainty that owes, in part, to the conflict in the Middle East." It cited the energy shocks that have driven up prices in some sectors.

Warsh has repeatedly vowed the Fed would bring inflation down to its 2% target — a measure it has missed for the last 63 months. He deflected questions from reporters on July 29 as to how this will be achieved, responding that there is "no magic wand."

(You can read the full transcript of Warsh's press conference here and watch the video here.)

"But at what point is he actually going to act?" Yardeni Research President Ed Yardeni told CNBC on July 30. "What's it going to take?"

The Tricky Part

• Lower interest rates support hiring but can fuel inflation, potentially leading to an inflationary spiral.
• Higher rates cool prices but can weaken the job market, increasing the cost of borrowing and further stifling economic activity.

Fed Holds Interest Rates Steady Thus Far This Year

The rate-setting FOMC voted unanimously in June to hold its benchmark Federal Funds Rate target in a range of 3.5% to 3.75%.

However, the minutes of the June FOMC meeting showed policymakers splitting their views on inflation risk and the impact on interest rates, with a rising hawkish tinge to the debate.