MNI FED WATCH: Warsh Leads FOMC Inclined To Hike Rates

Kevin Warsh kicked off his tenure as Fed chair Wednesday by cautiously embracing an FOMC that is increasingly thinking about raising interest rates before the end of the year. 

Warsh, who during the nomination process suggested interest rates should be lower, is now being forced to chair a committee worried by growing price pressures related in part to the supply shock from the war in Iran. 

The Fed’s dot plot showed nine officials wanted to hike rates at least once, six of whom were projecting multiple increases before year end. FOMC members sharply revised up their inflation forecasts of the PCE and core PCE to 3.6% and 3.3% respectively, up from 2.7% in the March Summary of Economic Projections. 

“I am happy to report that members of the FOMC are unambiguous and unanimous – this committee will deliver price stability,” Warsh told reporters at his first press conference as chair. (See MNI INTERVIEW: Fed Needs To Signal Ready To Hike-Baumeister) 

GUIDANCE PULLBACK

Warsh put his mark on the Fed’s policy statement by putting into practice a more circumspect approach to communication that avoids any hint of forward guidance on rates. He also offered much less detail on his economic and rates views than his predecessors in the press conference. 

“Absent also is so-called forward guidance, which we agreed was not well suited to the current policy juncture,” Warsh said. 

He also refrained from submitting his own dot to the Summary of Economic Projections, an early effort to move away from what Warsh sees as undue commitments on the future path of policy. 

“I did not submit a dot. For me, it’s not helpful to the conduct of policy,” he said. (See MNI INTERVIEW: Warsh Set To Dial Back Fed Guidance - Swanson)

The policy statement affirmed the committee’s desire to return to price stability and nodded to strong productivity growth that could be used to argue that the economy can grow more robustly without generating inflation.

The Fed also reaffirmed its policy of maintaining ample reserves in the banking system. Warsh has called for shrinking the balance sheet significantly over time, but not specifically returning to the pre-crisis framework of scare reserves. 

'A TASKFORCE FOR THAT'

Warsh, who promised regime change at the central bank, announced the formation of five task forces focused on communications, the balance sheet, economic data, productivity and jobs, and the Fed’s inflation framework. 

He made clear he would not prejudge the outcome of these groups, adding that he would consult the best minds from inside and outside the Fed to guide the recommendations. 

Still, he reaffirmed the Fed’s commitment to the 2% target: “I see no reason, until we have reestablished our commitment and ability to deliver on the 2% inflation objective, to revisit that. So that'll be outside the scope of what we're taking on.” 

MNI RIKSBANK WATCH: Rates Unchanged, 50/50 Chance Hike Or Hold

The Riksbank left its policy rate on hold and raised its quarterly rate projection, with Governor Erik Thedeen assigning a 50/50 probability to a hike or hold going forward.

The Swedish central bank's executive board discussed risks around the proposed Memorandum of Understanding between the U.S. and Iran, Governor Erik Thedeen said in an MNI interview, adding that the decision and guidance reflected the uncertainties around the putative agreement. (See MNI INTERVIEW: 50/50 Hike Chances Due To Iran Doubts-Thedeen)

The Monetary Policy Report's central projection showed Iran war-linked supply shocks pushing down on growth and up on inflation through direct and indirect effects, with the latter expected to add 0.4 percentage points at most next year to the target CPIF, which was still expected to hold below target at 1.7% in 2027 before rising to 2.8% in 2028.

The policy rate was shown edging up to 1.76% in Q3 and to 1.93% in Q2 next year, leaving the question hanging of if and when the first hike will come. Alternative scenarios showed higher and lower inflation profiles, with the latter due to stronger second round and indirect effects from the war.

MNI INTERVIEW: EUR3 Bln Bond Kept Up Greek Market Presence-DMO

Part of the EUR3 billion raised in Greece’s 10-year syndicated bond last week will probably be used to accelerate early repayments of bailout loans, the head of the public debt management agency, Dimitrios Tsakonas, told MNI, adding that the issuance was a strategic move to reinforce its presence in the financial markets.

"We can't disappear from the capital markets," Tsakonas said in an interview, noting that Greece has already covered its financial needs for 2026. "If you are out too long, investors make you pay a premium because they forget about you. Our last issuance was in January, and the next one was expected for the following January." 

Part of the EUR3 billion will most probably be used for early repayments, though a final decision will be made by September and will ultimately depend on the country's ability to deliver a substantial fiscal surplus and reach its target of a 137% debt-to-GDP ratio or below, Tsakonas explained.

He noted that Greece does not need such substantial cash reserves, and aims to bring them down to around EUR20 billion by the end of the decade.

"Early repayments are a no-brainer," Tsakonas said. "Given the fact that Greece now has full access to the capital markets, we no longer need to preserve EUR30–40 billion in cash reserves."

BIGGER FISCAL SURPLUS

According to the Medium-Term Fiscal Plan for 2026, the projected fiscal surplus of 2.4% of GDP was revised upward to 2.8% in the national budget due to the carryover effect of stronger fiscal performance in previous years. Tsakonas noted that this figure could likely reach 3.2% of GDP or even higher.

Tsakonas said the country will reach a 100% debt-to-GDP ratio within eight to 10 years based on "conservative assumptions." Over time, he expects rating agencies to upgrade Greece back to the A+ level it held before the financial crisis.

Still, he saw little chance that rating agencies would upgrade Greece's rating to BBB+ or change the outlook to positive in the near future, placing any potential improvement at the end of this year at the earliest, but most likely next year.

"They are expecting to see an impressive debt-to-GDP reduction," Tsakonas said. "My mission is that if we want to improve, we have to accelerate it."

MNI INTERVIEW: 50/50 Hike Chances Due To Iran Doubts-Thedeen

The Swedish central bank’s new policy guidance that there is a 50/50 chance of either a prolonged hold or a hike was made after a lengthy discussion of the uncertainty surrounding a prospective U.S.-Iran peace deal, Governor Erik Thedeen told MNI.

The Riksbank left its policy rate on hold in June and raised its rate path without fully factoring in a hike this year. It was one of the first of the central bank pack to set policy following news of the U.S.-Iran Memorandum of Understanding, and Thedeen stressed that while this came too late to be factored into the quarterly forecasts it was incorporated into the decision and guidance.

The Executive Board’s discussion focussed on risks around the deal, he said.

"Where will it end up? Will it actually be an agreement? Will it be followed? Will [ships] actually be able to pass the Hormuz Strait? You know, all that is still uncertain today," Thedeen said in an interview.

The Riksbank could change its forecasts once things become clearer, "but we're not there yet ... [there's a risk] of more conflict growing between Israel and Hezbollah, and all of a sudden we're in a different situation," he said.

"What people are doing ... is jumping to the conclusion that we're in a different world. That has not been in our thinking, we are thinking 'this is the declaration,' it's had some effects on the oil price, and we still have a lot of uncertainties.” (See MNI INTERVIEW: Signs Swedish Inflation Pressure Rising - NIER)

 KRONA AND THE ECB 

While interest rate differentials could weigh on the Swedish currency, particularly after the European Central Bank’s hike last week, this was not a constraint on policy setting, Thedeen said. The krona depreciated about 0.2%, at 10.89 to the euro, five hours after the decision.

"I don't think it limits [us]," he said, adding that the board does not take the view it "can't do something because we're so worried about a specific interest rate differential, but of course we are aware that this could have an effect on the krona.”

The rate differential "effect is far from direct" he said.

While the krona strength of the past 18 months is fading, Thedeen noted that it was "one of the reasons why, especially goods, inflation has been subdued," he said.

"Okay, it's been slightly weaker since, but nothing compared with the strengthening we had last year. So, this is still a factor that is important, I think, for this decision. And if you look on the changes since March, it's not dramatic, right? So, I think the big picture is still that some of the strengthening is still feeding into the kind of price setting, but less and less, I guess, as time passes."

"We don't have persistent deflationary forces from the strengthening last year in our forecast," he added.

REVERSING QT AND LIQUIDITY

The Riksbank has been at the front of the pack of central banks in reducing its stock of assets built up through QE, and is committed to a path of ending its abundant reserves system, though lack of interbank liquidity is a concern.  (See MNI INTERVIEW: Market Absorbing Swedish QT Bonds - Riksgalden)

"We're very committed to bringing down our balance sheet, and we've been showing that also in action, both active QT and the more passive QT that brought down the balance sheet fairly quickly and quicker than most other central banks. I would argue we still have excess liquidity, also due to the FX reserve, which is financed … by ourselves," he said.

"There've been some bumps in the interbank market, nothing dramatic, and you know, lately, nothing," Thedeen said.

In order to boost liquidity "we don't exclude the possibility to lower the rate on the floor, and that's basically where we are. I think we are in fairly good position to actually manage to bring this from an abundant liquidity system, [where] everything is in a deposit in the central bank in reserves, into a … corridor system. That's what we're aiming at," he said. (See MNI INTERVIEW: Higher Bar To Future Riksbank QE - Thedeen)

MNI SOURCES: ECB September Meeting 'Live' Despite Iran Deal

The fall in oil and gas prices following news of a deal to reopen the Strait of Hormuz is bringing the European Central Bank closer to its “milder scenario,” Eurosystem sources told MNI, adding that a pause in the July meeting is now very likely but that another hike looks set to be discussed in September given early signs of indirect feedthrough to prices from dearer energy.

With Brent crude now below USD80 a barrel and natural gas futures also sliding, energy prices are below those assumed in the milder scenario, which sees HICP inflation rising to 2.9% this year before falling back slightly below the 2% target in 2027, officials noted. But, despite the fact that second-round effects from dearer energy have yet to materialise, several sources said that they still see the September meeting as live.

“Even with the [Iran] agreement, inflation is already here,” one source said, pointing in particular to the acceleration in services inflation, which hit 3.5% in May, though adding that a confirmed Iran peace deal and a potential quick recovery in LNG production could have a positive effect on expectations. “Even if this agreement holds, it will take a while to recover and return to previous prices.”

SCENARIO ASSUMPTIONS

While uncertainty is still elevated, with questions both over the durability of peace in the Persian Gulf and over the speed at which energy supplies will return to normal, and while the eurozone economy is barely growing, with composite PMI in contraction territory, several officials told MNI they see one more hike this year as the most likely outcome. One source noted that the ECB’s scenarios had assumed further tightening, though the market assumptions they incorporated of three rate hikes in 2026 are now outdated.

“I understand that the numbers presented are only projections on assumptions, but they are what we have,” the source said. “I think under the mild scenario -- and as of now I'd guess we are between mild and baseline -- we are probably less likely to have to even consider what would have been a third 25-basis-point hike. However, personally I'd say at a constant state, we will still likely hike just once more in September.”

While second-round inflation effects are not visible so far, there are some spillovers from more expensive energy into prices, the source said.

“If the energy futures prices do slope significantly lower in the next few months, we may be able to stay on hold in September … But we probably do now have to factor in some type of risk factor on energy prices that even a fully signed deal in a few months could easily fall apart."

June’s 25-basis-point hike in the Deposit Rate to 2.25% still leaves the ECB on the upper end of its estimate of the neutral range of interest rates, the official added, playing down the risk of a policy mistake. (See MNI ECB WATCH: ECB Hikes, Sticks With Meeting-By-Meeting)

“We are still in that range, so it’s not as if we have turned to an aggressive restrictive rate regime.”

SECOND-ROUND RISKS

No clear second-round effects from higher energy prices have shown up yet, but indirect effects are already visible, another source said, adding that firms’ pricing expectations are also tilted to the upside.

At the same time, there are fears among officials that ECB projections might be too optimistic on the growth side.(See MNI SOURCES: Growth Outlook Darkens As ECB Heads For June Hike)

“Keep an eye on the labour market. We have to watch out for weakening because it could give us an important signal,” one source said. But, he added: “September is super live. We will not take risks. We are in fine-tuning territory if this [Iran deal] holds.”

Another source agreed that expectations for growth may be overblown, despite challenging  inflationary conditions, but stressed that the ECB would persist with its data-dependent, meeting-by-meeting approach.

“The outlook remains tough,” the source said. “We really will go where the data takes us.”

An ECB spokesperson declined to comment.

MNI INTERVIEW: China Property Bailout Would Take 10% Of GDP

Disposal of bad debt from real estate-related companies and financial institutions caught up in China’s real estate downturn would cost around 10% of GDP, a prominent economist told MNI, adding that such a rescue is necessary in order to address weak domestic demand and disinflationary forces now being reinforced by AI.

Extrapolating from Japan's experience in disposing of non-performing assets from 2002 to 2004 implies that China would need to spend on a significant scale to clean up non-performing debt as a result of the falling property sector, requiring tremendous determination and capacity for execution from policymakers, said Lu Ting, chief China economist at Nomura.

But the drain on residential and local government investment has exacerbated deflationary pressures, leading to a continuous fall in China's 10-year treasury yields over the past few years, even as yields overseas rise, reducing global investors’ interest in Chinese assets, he said in an interview. Lu acknowledged that he saw little room for either monetary or fiscal easing in the second half of 2026, but expects year-on-year GDP growth to slow to 4.1% in Q2, compared to market expectations of expansion of 4.7%. The country saw a 5% y/y GDP expansion in Q1, much higher than expectations. (See MNI: PBOC To Support Fiscal Efforts, Broad Easing Seen Limited)

The negative interest rate differential between China and other big economies has led to capital outflows and several rounds of yuan depreciation since the autumn of 2022, prompting the authorities to strengthen capital controls, Lu noted.

A failure to resolve real estate debts would leave China in danger of repeating the stagnation which befell Japan, while the fiscal burden on cities throughout the country grows ever larger, he said, estimating that the average decline in national housing prices from their peak has been about 35% to 40%.(See MNI INTERVIEW: PBOC Must Stoke Inflation, Target 4% CPI)

AI IMPACTS

This disinflationary pressure could increasingly be exacerbated by the development of AI, which could amplify the wealth gap between Chinese residents and across regions, further weakening consumption and investment demand and posing major challenges to policy making, Lu said.

While the AI boom is boosting fixed asset investment, exports and productivity, it is unlikely to rescue the economy from the current cycle of weak growth and prices, the economist said. AI-related industries should account for more than 1% of GDP in 2026, while AI-related fixed asset investment should contribute 0.3 percentage points to growth, but these shares are well below those of real estate and traditional infrastructure. AI investment is also significantly lower than peak levels in new energy vehicles, lithium batteries, and photovoltaic panels, he added, noting that the threshold for AI investment is high and that the sector still faces barriers from U.S. restrictions on export of key equipment.

AI accounted for half of China’s 19% export growth in dollar terms in May, though this was mainly due to rising prices, Lu said. Chip exports grew by 110% last month, but were up only 2% in volume terms, he noted.

A strong export performance does not anyway fully compensate for weak domestic demand, while the economic benefits of AI are highly concentrated in a small number of cities with high-end talent, he said. The marginal propensity to consume of the elite group benefitting from AI is low, while the middle- and low-income groups vulnerable to displacement by the technology, including many college graduates and flexible workers, have a strong willingness to consume, though their purchasing power is declining due to unstable employment and wage pressure, Lu said.

Coming on top of delayed marriage rates and low levels of childbirth, AI will add to sustained deflationary pressures, while any recovery in the real estate market may be limited to a few, mainly tier-one cities, according to Lu.

The economist argues that policymakers, while promoting AI investment, should take measures to avoid the continued widening of regional disparities and allow lower-tier cities to share in the AI dividend. They should improve social security provision to alleviate the effects of unemployment caused by AI substitution, and slow down the deployment of technologies such as autonomous driving that have an impact on blue-collar jobs, he said.

MNI: More Support Eyed To Stabilise China's Property Market

Authorities are likely to ease home-purchase restrictions further to support first-tier property markets as they show signs of stabilisation, with a seasonal rebound proving more resilient than expected, advisors and analysts told MNI, though the scale and scope of any relaxation remains contentious amid an L-shaped recovery still vulnerable to setbacks.

"The lifting of remaining purchase restrictions in core areas is possible within the year should the first-tier markets cool down again," said Xie Yifeng, dean of the China Urban Real Estate Research Institute, who also called for a new round of policy support, including accelerating local governments' purchases of unsold homes for affordable housing and urban renewal programmes, maximising the use of housing provident funds, and reducing transaction taxes and fees to sustain the recovery.

Authorities could also trial easing loan restrictions on third-home purchases in major cities, potentially unlocking a significant amount of pent-up demand, he added.

However, Yan Yuejin, vice president at the E-House China Research and Development Institute, expressed reservations about fully removing purchase restrictions in core areas, arguing a sharp market downturn is unlikely as transaction volumes have reached a new level and scale, aside from monthly fluctuations. Encouraging and releasing demand for upgraded housing will be a key focus of future policies, he added.

The current recovery is being driven mainly by first-home buyers, while demand for upgraded housing remains suppressed because many households face difficulties "selling old and buying new," Yan said. Many potential buyers would incur losses on existing properties while facing relatively high prices for new homes, he noted. Local governments should consider subsidies for home replacement purchases or mortgage interest subsidies to facilitate upgrading demand and further stimulate housing activity, Yan added.

STABILISED MARKETS

Monthly existing-home transactions in Shanghai exceeded 28,000 units for three consecutive months through May, a streak and transaction volume not seen since 2022. In Beijing, transactions remained above 16,000 units, with April and May posting the strongest readings for those months in five years.

"The bottom of the housing market in first-tier cities has been basically established, evident in continued strength in second-hand housing transactions and stabilising new-home sales fluctuating within a narrow range," Yan said. The official new home price index in first-tier cities continued to grow for the fourth consecutive month by 0.2% month-on-month in May, indicating a turning point that its year-on-year decline of 1.7% could also be reversed, Yan added.

Xie argued that core areas in first-tier cities have effectively bottomed out, with both transaction volumes and home prices maintaining an upward trend for more than three consecutive months since March. However, sales volumes and prices in non-core areas continue to decline, with inventory cycles exceeding 20 months and a large overhang of second-hand listings, highlighting a divergent recovery.

"The stabilisation of housing markets in core areas and key cities will drive the recovery of surrounding regions and send a strong signal of broader economic improvement despite the drag from declining real-estate investment," he said. Xie, who believes the market requires a continuous six-to-nine-month rebound in both sales volumes and prices to confirm a durable bottom, warned that June sales are showing signs of softening and that a renewed slowdown is possible during the traditional off-season over the next three months.

Li Yujia, chief research fellow at the Guangdong Urban & Rural Planning and Design Institute, said the market is unlikely to repeat the sharp decline seen after the second quarter of last year, citing lower inventories and improved sentiment. However, he cautioned that the recovery still needs to gain momentum ahead of the September-October peak selling season. Stable existing-home prices, restrained land supply and manageable inventories of under-construction but unsold housing have significantly boosted market confidence, Li added. (See MNI: China's Improved Property Market Reduces Stimulus Need)