Doha, Qatar: Qatar National Bank (QNB) expects the US Federal Reserve to adopt a more hawkish monetary policy under its new Chair, Kevin Warsh, with interest rate decisions likely to remain driven by incoming economic data amid persistent inflationary pressures and elevated inflation expectations.
In its weekly report, QNB said inflation remains well above the Federal Reserve's 2 percent target, while policymakers continue to warn of upside price risks, reinforcing expectations that further monetary tightening will be required. As a result, the bank sees additional interest rate hikes as the most likely policy path in the coming months.
According to the report, financial markets are pricing in a 25-basis-point rate increase by the end of the year, which would lift the federal funds rate to 4.00 percent, with a further increase likely during the first quarter of next year.
QNB noted that expectations for US monetary policy have shifted markedly in recent months. At the start of the year, markets anticipated a gradual easing cycle as inflation moderated and economic growth remained resilient. However, the escalation of tensions in the Middle East and the resulting surge in energy prices disrupted that outlook by reigniting inflationary pressures.
The report said higher energy costs have pushed US inflation to nearly 4 percent, about double the Federal Reserve's target, prompting markets to reassess the expected path of monetary policy. Consensus inflation forecasts for this year have also risen sharply, from around 2.6 percent before the regional escalation to approximately 3.5 percent in the latest estimates.
QNB highlighted that the appointment of Kevin Warsh as Federal Reserve Chair has reinforced the central bank's focus on restoring price stability. It said Warsh's first monetary policy meeting and subsequent public remarks underscored a clear commitment to bringing inflation back to target, while placing comparatively less emphasis on labor market risks.
The bank noted that although the Federal Reserve continues to operate under its dual mandate of price stability and maximum employment, its latest policy meeting signaled a stronger focus on inflation risks. At the same time, labor market conditions received relatively limited attention, reflecting policymakers' assessment that employment remains broadly resilient.
QNB also said the shift is evident in the Federal Open Market Committee's latest projections, with policymakers revising inflation forecasts higher and moving away from expectations of interest rate cuts toward a greater likelihood of additional monetary tightening.
The report argued that the Federal Reserve's increasingly hawkish stance reflects not only current inflation levels but also a determination to preserve the credibility of monetary policy.
It noted that Warsh acknowledged inflation has remained above the central bank's target for more than five years, highlighting the challenges of restoring price stability and strengthening the case for maintaining restrictive monetary conditions for longer.
QNB concluded that these developments have triggered a sharp reassessment of market expectations for US interest rates. Investors who had previously anticipated a gradual easing cycle now increasingly expect policy to remain restrictive for longer, reflecting renewed inflationary pressures and the Federal Reserve's more hawkish policy stance.
