What does the Warsh era mean for Fed policy

17 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 Headline and core US consumer price inflation Chair Kevin Warsh indicated that policymakers were in a period of moderated as expected in July, with the annual "watchful thinking." Although the Fed remains vigilant on inflation core rate at 2.5% compared with 2.6% in June. risks, we believe it will keep rates on hold in the second half of the Monthly inflation data remain consistent with year as disinflation trends reemerge. With yields currently elevated, gradual disinflation, supporting a Fed hold in the we see an appealing risk-reward outlook for short- and medium- near term. duration quality bonds. One liner

01 The Fed left policy rates unchanged in July. We believe the Fed is likely to keep policy rates on hold as disinflation resumes and "watchful • The FOMC kept the federal funds rate unchanged at 3.50-3.75% thinking" prevails. in July, though three hawkish dissents highlighted ongoing US inflation concerns. Did you know? • Chair Warsh signaled that the central bank is in a period of "watchful thinking." • The FOMC removed forward guidance from its statement in June and has shortened the • Structural changes to Fed communications and the launch of statement significantly, now offering only a multiple task forces suggest a cautious policy approach in the near high-level assessment of economic conditions. term. • Chair Warsh has not submitted rate projections, consistent with his earlier criticism 02 We expect rates to stay on hold as "watchful thinking" prevails. of the dot-plot framework. This partial participation highlights growing skepticism of • The combination of a new chair regime and a wide dispersion of the dot-plot framework and raises questions views among FOMC members implies a higher bar for near-term about its role over time. action in either direction. • Cash tends to underperform other assets over • US inflation data moderated in June, reinforcing our view that the time: Stocks have outperformed cash in 86% peak impact of tariffs has passed. of all 10-year periods and 100% of all 20- • We expect the Fed to keep rates on hold for the remainder of the year periods since 1926. year. Likely slower economic growth trends and disinflation in the US in the second half should support a pivot toward lower policy Investment view rates in 2027. We believe elevated yields on short- and

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

• We believe yields on short- to medium-duration quality bonds are appealing. Investors looking to enhance or diversify portfolio income can consider complementing this with higher-yielding credit and equity income and yield-generating strategies.

• 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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