Latest economic outlooks indicate that inflation will be the Federal Reserve's primary concern for the remainder of 2026, though this does not signal an immediate shift in monetary policy. Market participants expect the new Fed leadership to likely maintain interest rates, primarily because policymakers are still observing how external price pressures, such as tariffs and energy shocks, transmit to core inflation levels.
Analysts who formerly served as chief economists at major institutions believe the Fed's current reaction function is clearly biased toward inflation in both the short and long term, linked to inflation failing to return to target levels over the past five years. Price pressures in the last two years mainly stemmed from tariffs and energy shocks. The Fed needs to distinguish between one-off exogenous shocks and domestically generated inflation dynamics. Currently, domestic inflation dynamics are not significantly heating up. Housing accounts for about 35% of the Consumer Price Index weight, and real-time indicators suggest housing inflation may remain mild or even soften slightly in the coming months. Meanwhile, wage growth is around 3% to 3.5%, a level consistent with an inflation target of approximately 2%.
Based on these assessments, the market expects the Fed to continue holding rates steady while waiting for external price pressures to subside. Adopting a wait-and-see stance is more prudent before clearly understanding how these exogenous shocks transmit to core inflation; thus, forecasts include an extended pause throughout 2026. Regarding the new Fed Chair's cautious attitude toward forward guidance and refusal to participate in the dot plot, analysts believe this approach is reasonable given the current economic environment. Forward guidance is an effective tool in certain situations, but not suitable in the current high-uncertainty environment. Even policymakers who recognize the value of forward guidance do not believe now is the appropriate time to use it.
However, some voices warn that the new Chair may be too hawkish early in their tenure, potentially facing greater policy constraints later. If the next two CPI readings exceed expectations, whether the Fed will be forced to act due to previously overly aggressive stances becomes a realistic issue. Monthly data itself is volatile and should not be overinterpreted based on single-month performance. However, against a background of strong hawkish expectations, if inflation rises again, whether the Fed can still choose not to hike rates remains an open question. Since the FOMC meeting, core PCE data was better than expected, oil prices fell, core GDP was revised down, and non-farm payroll data was significantly weaker than expected. These factors are insufficient to support a Fed rate hike in July.
Regarding gold and global central bank reserve allocation, views suggest that regional conflicts are catalysts for countries accelerating de-dollarization and increasing gold holdings. However, what truly drives this trend is US policy uncertainty, especially regarding trade and sanctions. Previous events indeed prompted countries to seek reduced reliance on the dollar, but subsequent US policy unpredictability further exacerbated this trend. As the US becomes less predictable on trade issues, other countries' central banks naturally reduce USD exposure within feasible limits and increase gold allocation. The market has not observed large-scale selling of USD assets; more commonly, USD positions are not rolled over for investment, resembling a quiet exit. Although doubts about US trade policy and fiscal trajectory are rising, the US private sector remains the most dynamic, flexible, and innovative system globally. This means the USD will still receive certain support, though official asset demand may weaken slightly.
