What does the Warsh era mean for Fed policy

3 August 2026, 07:57 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. Chair Kevin The Fed kept rates on hold for a fifth Warsh signaled little urgency to tighten policy and indicated that the consecutive meeting. Three regional Fed Fed was in a period of "watchful thinking." Although policymakers presidents dissented, advocating instead a 25bps are likely to remain vigilant on inflation in the US, we believe market rate hike. However, the fact that there were only pricing for rate hikes over the next 12 months appears somewhat three dissents suggests to us that the FOMC aggressive. We see current US yields as appealing and favor short- leadership—the chair, governors, and the New and medium-duration quality bonds. York Fed president—prefers to watch and wait for further improvements in US inflation.

01 The Fed left policy rates on unchanged in July. One liner • The FOMC kept the federal funds rate unchanged at 3.50-3.75% We believe the Fed is likely to keep policy rates in July, though three hawkish dissents highlighted ongoing US on hold as "watchful 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 June, reinforcing our view that the • Cash tends to underperform other assets over peak impact of tariffs has passed. 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 current market conviction around Fed rate hikes over the next 12 months • Current market conviction around Fed rate hikes over the coming is somewhat too aggressive. We see an year appears somewhat too aggressive, in our view. opportunity for investors to lock in yields, particularly in short- and medium-maturity • We believe yields on short- to medium-duration quality bonds quality bonds. We also expect Fed policy to are appealing. Investors looking to enhance or diversify portfolio remain broadly supportive for US equities. 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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