What does the Warsh era mean for Fed policy

24 August 2026, 08:10 UTC Chief Investment Office GWM Investment Research

What does the Warsh era mean for Fed policy? UBS House View Briefcase Andrew Dubinsky, US Economist, UBS Financial Services Inc. (UBS FS); Vincent Heaney, Strategist, UBS AG London Branch; Alison Parums, Strategist, UBS Switzerland AG

Key message New this week The Federal Reserve left interest rates unchanged in July and The minutes of the FOMC's July meeting Chair Kevin Warsh indicated that policymakers were in a period of showed that "many participants assessed that "watchful thinking." Although the Fed remains vigilant on inflation policy tightening would likely be necessary if risks, we believe it will keep rates on hold for the remainder of the inflation did not decline." The minutes also year as disinflation trends reemerge. With yields currently elevated, noted that Chair Warsh raised the idea of we see an appealing risk-reward outlook for short- and medium- reducing the FOMC's current meeting schedule duration quality bonds. from eight per year to six.

One liner 01 The Fed left policy rates unchanged in July. We believe the Fed is likely to keep policy rates • The FOMC kept the federal funds rate unchanged at 3.50-3.75% on hold as disinflation resumes and "watchful in July, though three hawkish dissents highlighted ongoing US thinking" prevails. inflation concerns.

• Chair Warsh signaled that the central bank is in a period of Did you know? "watchful thinking." • The FOMC removed forward guidance from • Structural changes to Fed communications and the launch of its statement in June and has shortened the multiple task forces suggest a cautious policy approach in the near statement significantly, now offering only a term. high-level assessment of economic conditions.

• Chair Warsh has not submitted rate 02 We expect rates to stay on hold as "watchful thinking" prevails. projections, consistent with his earlier criticism of the dot-plot framework. This partial • The combination of a new chair regime and a wide dispersion of participation highlights growing skepticism of views among FOMC members implies a higher bar for near-term the dot-plot framework and raises questions action in either direction. about its role over time. • US inflation data moderated in July, easing the pressure for • Cash tends to underperform other assets over imminent rate hikes. time: Stocks have outperformed cash in 86% • We expect the Fed to keep rates on hold for the remainder of the of all 10-year periods and 100% of all 20- year. Likely slower economic growth trends and disinflation in the year periods since 1926. US in the second half should support a pivot toward lower policy rates in 2027. Investment view

03 We continue to like short- and medium-duration quality bonds. We believe elevated yields on short- and medium-duration quality bonds offer an • Current market conviction around Fed rate hikes over the coming opportunity to lock in a durable source of year appears somewhat too aggressive, in our view. portfolio income. We also expect Fed policy to remain broadly supportive for US equities. • We see currently elevated yields on short- and medium-term bonds as appealing, and expect yields to decline over the next 12 months.

• We believe Fed policy overall will remain supportive for US equities, and we favor a balanced and diversified approach to the asset class.

This report has been prepared by UBS Financial Services Inc. (UBS FS) and UBS AG London Branch and UBS Switzerland AG. Please see important disclaimers and disclosures that begin on page 3.

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