New Fed Chairman Kevin Warsh has surprised analysts with a hawkish tone and an unwillingness to communicate with the market.
While he has launched several working groups to investigate how the Fed should work in the future, Warsh has clearly distanced himself from so-called forward guidance - the guidance that central banks typically provide to give the market a clue about where monetary policy and interest rates are headed.
He communicates virtually nothing, notes Mattias Persson, chief economist and global manager at Swedbank.
Increased risk
The fact that Warsh now intends to let the market float in uncertainty also increases the risk premium for the Fed to raise the policy rate in the longer term, according to Mattias Persson.
Although he, like the lion's share of analysts, believes that the Fed will keep the policy rate unchanged at between 3.5 and 3.75 percent on Wednesday evening, Mattias Persson sees a certain risk of an increase.
It's very even, there's probably a 60 percent chance that the interest rate will remain unchanged, but a 40 percent risk of an increase, he says.
As the Fed closes the door to guidance and interest rate formation becomes more secretive, the market becomes more uncertain, he reasons.
Therefore, it is highly likely that there will be a risk premium on interest rates, and it is less clear how the central bank will react.
Prioritizes inflation targeting
Warsh has also been clear that he prioritizes inflation targets and price stability, so the Fed will not make interest rate cuts lightly, predicts Mattias Persson.
Although Swedbank's forecast is that the Fed will leave the key interest rate unchanged even during the autumn, the market believes in at least one interest rate hike later this year. This is partly as a result of higher oil prices, which are expected to boost inflation.
President Donald Trump has called for the Fed to cut interest rates since he was elected, and he was harsh in his criticism of Warsh's predecessor - Jerome Powell - for not cutting interest rates. As recently as Monday, he repeated the demand.
"We will have the world's lowest interest rates," he told journalists at the time.
