In the early hours of Thursday morning Beijing time, the Federal Reserve will announce its July interest rate decision. The second interest rate meeting after new Chairman Warsh took office is falling into unprecedented differences in expectations. CME Group's FedWatch tool shows that the market is pricing in nearly 40% of this interest rate hike, and neither the bulls nor the shorts are convinced enough. In the view of the Wmax macro research team, the market debate has always remained on the superficial logic of "whether inflation data supports interest rate hikes", but has not touched the core essence of this decision: the Federal Reserve under Warsh has already jumped out of the traditional "data-policy" linear response framework. The current expected combination of "hawkish propaganda throughout, but actual inaction" is behind its precise trade-offs in the three dimensions of policy philosophy, reform agenda and political environment, and the depth of its decision-making far exceeds the current market consensus.

Reconstructing policy philosophy: judging inflation beyond the traditional framework

The escalation of the conflict between the United States and Iran has pushed up energy prices, and the expansion of AI infrastructure has driven upstream costs. These are the core reasons for the current market to advocate interest rate increases. However, Wmax noticed that Warsh’s own logic of judging the impact of inflation has formed a clear difference with previous Fed chairmen.

On the one hand, regarding energy price fluctuations, Warsh has made it clear at the Senate hearing that supply-side shocks to a single commodity are beyond the scope of direct control by the Federal Reserve and do not necessarily lead to out-of-control overall inflation. As long as widespread price pressure does not spread, the Fed does not need to use interest rate hike tools to respond. This judgment is also confirmed by June CPI data - before the outbreak of a new round of conflicts in the Middle East, overall inflationary pressure in the United States has shown an easing trend.

On the other hand, Wash is also cautious about concerns about the rising costs brought about by AI investments. According to Wmax’s analysis, Wash defined AI-related price increases as “a one-time adjustment under the mismatch of supply and demand” and believed that the market would self-correct through supply expansion rather than sustained inflation that requires tightening and suppression by monetary policy. This strict definition of “inflation persistence” is a core feature of the Warsh policy framework, and it is also a new reaction function that most market institutions have not fully adapted to. They are still using the old framework to calculate the probability of interest rate hikes, and will naturally continue to overestimate the possibility of interest rate hikes.

Reform agenda priority: Waiting and watching is to buy time for framework reshaping

Different from the market interpreting "no interest rate increase" simply as a wait-and-see approach to the economy, Wmax believes that one of the core considerations for suspending interest rate increases is to reserve space for the systemic reform of the Federal Reserve led by Warsh. The five external expert working groups established by Warsh after taking office cover core areas such as economic assessment methods, inflation framework reconstruction, balance sheet management, and policy communication optimization. The essence is to conduct a comprehensive review of the monetary policy concepts of the past few decades, including whether the Federal Reserve relies too much on forecasts, whether it underestimates inflation risks, and whether new technologies such as AI change the underlying logic of economic operations.

Wmax further pointed out that if you rush to start raising interest rates when hosting the second FOMC meeting, it will be equivalent to defaulting to traditional response ideas before the policy framework has been re-evaluated, which will directly eliminate the significance of this round of reforms. The current hawkish rhetoric is more like an "expectation management buffer zone" - not only maintaining the market credibility of fighting inflation, but also buying time for the working group to form conclusions, achieving a balance of "tough statements and suspended actions." This strategy also exactly confirms the observation of market participants: the working group itself is the "time buffer" of Warsh's policy.

Political environment constraints: realistic considerations for balancing credibility

In addition to judgments at the economic and reform levels, the weight of political variables cannot be ignored. Wmax observed that although Warsh repeatedly emphasized the independence of the Federal Reserve's policy, the Trump administration's political preferences have become a realistic constraint that cannot be completely bypassed in its decision-making. Trump has long advocated low interest rates and continued to put pressure on the Federal Reserve, even publicly criticizing the existence of "people unwilling to take the right actions" within the Board of Governors. At the same time, there are still uncertainties about former Chairman Powell's fate. If subsequent relevant investigations are carried out, there will be personnel vacancies on the board of directors. If Warsh wants to influence the selection of the next director, he needs to avoid new direct conflicts with the White House.

Wmax believes that the current market interpretation of political factors is generally superficial, either simply asserting that the Fed "takes orders from the White House", or completely ignoring political influences. The real logic is: Warsh needs to find a balance between "maintaining anti-inflation credibility" and "retaining political space for reform." Raising interest rates hastily will not only be labeled as "continuing Powell's line" by conservatives, but may also trigger attacks from the Trump camp, which will instead reduce his space for subsequent reforms. This multi-dimensional political balance is the underlying logic most easily ignored by the market in this round of expected disagreements.

The other side of interest rate hikes: Historical mirror and the game of expectations

Of course, Wmax has not completely ruled out the possibility of a rate hike. The "defensive interest rate hike" advocated by some is not without basis - the current U.S. inflation is still 3.5% year-on-year, significantly higher than the 2% policy target. If the credibility of anti-inflation can be consolidated through a single interest rate increase, it is also in line with Warsh's governance philosophy of "prioritizing rebuilding the credibility of the central bank." However, Wmax combed through historical patterns and found that in the history of the modern Federal Reserve, it is extremely rare to not initiate continuous tightening after a single interest rate hike. The only two exceptions have special historical backgrounds.

This means that the real game point at this meeting is by no means “whether to raise interest rates by 25 basis points”, but whether the Federal Reserve officially launches a complete tightening cycle. What deserves more attention is the reverse risk hidden in the “minimalist communication” model promoted by Wash. Wmax pointed out that Warsh’s original intention was to reduce forward guidance and force the market to interpret the data independently. However, the current rising expectations for interest rate hikes may instead create pressure for “self-fulfilling expectations” – even if economic data does not support interest rate hikes, rising market expectations will put decision-making pressure on committee members. The side effects of this policy communication model have not yet been fully priced in by the market.

Deduction of major asset classes: The shock pattern of the US dollar and gold

In view of the trend of the US dollar and gold, which is highly concerned by the market, Wmax has made a more detailed deduction than the market consensus from the three dimensions of committee voting structure, position pricing, and seasonal trading. For the U.S. dollar, if interest rates remain unchanged at this meeting, the trend of the U.S. dollar will directly depend on the degree of dissenting votes among members: if there are two or less dissenting members supporting an interest rate hike, market expectations for interest rate hikes will quickly fade and the U.S. dollar will experience a correction; if all members unanimously remain unchanged, the extent of the U.S. dollar selling will further expand. Currently, asset management institutions' long positions in the U.S. dollar have reached a new high since 2015, and a large hawkish premium has been factored in in advance. Once expectations fall short of expectations, the momentum for a correction will be even more significant.

For gold, Wmax determines that it is still difficult to break the shock pattern in the short term. On the one hand, the demand for hedging from geopolitical conflicts in the Middle East has not yet been fully cleared; on the other hand, expectations of interest rate hikes have continued to suppress gold prices, and the long and short forces are in a relatively balanced state. Coupled with the seasonal characteristics of thin market trading and concentrated disclosure of corporate financial reports in the summer, all parties have no intention of triggering trending prices at this time. The real catalyst for a break is likely to wait until the September interest rate meeting - by then the Federal Reserve will have more sufficient inflation data, and the working group is also expected to form a phased conclusion. Only the clarity of policy direction will drive gold out of the current shock range.

Overall, Wmax believes that "keeping interest rates unchanged + retaining hawkish language" is still the optimal solution for this meeting, and is also the most consistent with Warsh's current multiple demands. The core value of this meeting does not lie in the changes in interest rates themselves, but in the fact that the market can further understand Wash's true policy orientation and reaction function through resolutions and press conferences. In the future, Wmax will also continue to track the progress of the Federal Reserve's reform and the evolution of inflation data, providing a forward-looking basis for judgment on the allocation of major asset classes.