by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment opens with our thoughts on the Warsh-led initiative to dismantle conventional forward guidance. Following that, we examine several key market-moving developments, including Meta’s strategic pivot, the encouraging inflation figures out of the EU, and the prospect of another government equity stake. We also touch on other notable headlines before closing, as always, with a comprehensive roundup of the latest domestic and international economic data.

 Warsh Fed Takes Shape: Kevin Warsh recently offered clues into how Federal Reserve communications might evolve under his leadership. Speaking on Wednesday at a central banking forum in Sintra, Portugal, Warsh joined fellow central bank heads in articulating a unified stance on forward guidance, aiming to reset market expectations.

• Additionally, Warsh downplayed the idea of immediate changes to the central bank’s practices. However, he stated it was his “aspiration” to steer the Federal Reserve away from standard government data — which he labeled backward-looking — in favor of more real-time metrics. He also noted that the dots plot will remain in place for at least the short term while his task force conducts its review of Fed communications.

• That said, Warsh does not appear prepared to abandon forward guidance entirely. While he acknowledged that inflation has improved in recent weeks, he emphasized that readings above the Fed’s 2% target would not be tolerated, signaling a reluctance to support near-term rate cuts. He also reiterated his preference for continuing the balance sheet runoff, stressing that any policy adjustments would be clearly communicated in advance.
• However, Warsh does appear to be following through on his plan to establish a task force. On Wednesday, he announced that former Bank of England Governor Mervyn King will lead the initiative. King has previously criticized the Fed’s approach to forward guidance, arguing that policymakers should focus less on signaling specific near-term actions and more on outlining how policy would respond under different economic scenarios.
• King’s appointment suggests that Warsh may favor a shift away from rigid forward guidance, potentially aligning the Federal Reserve with a more flexible, data-dependent communication framework similar to that of the Bank of England. This broader move toward reduced reliance on explicit guidance has also been echoed by other policymakers, including ECB President Christine Lagarde at a recent forum and Bank of Canada Governor Tiff Macklem last week.
• Although there is growing interest in phasing out forward guidance, it doesn’t mean the transition will be a smooth one. In 2022, former Fed Chair Jerome Powell and Lagarde both moved away from forward guidance after being forced into more aggressive-than-expected tightening. Yet, both central banks ultimately reverted to the practice. Even recently, BOE Governor Andrew Bailey provided explicit guidance, noting that rate cuts are “off the table,” suggesting even the Bank of England hasn’t completely dropped the practice.
• Warsh’s appearance at the forum gave him a platform to signal how he intends to shape the Fed’s communication strategy. Market reaction so far has been muted, in part because the incoming data since he took over has largely matched expectations. In our view, as long as investors are confident that Warsh will respond decisively if inflation reaccelerates, they are likely to give him the benefit of the doubt. That goodwill could erode, however, if they begin to question his credibility.

 Meta Compute: Meta wants to sell its excess computing power in a move that will likely put it in competition with its Magnificent 7 rivals Amazon, Google, and Microsoft. The move comes as Meta has been spending heavily on building its own data centers to develop its AI models. The plan involves selling access to its AI models hosted on its own infrastructure, as well as raw computing power. This shift reinforces our view that hyperscalers will eventually behave more like utilities as companies transition from growth to mature stages.

 EU Inflation Eases: Preliminary data indicates that euro area inflation slowed more than expected in June. Headline inflation decelerated from 3.2% to 2.8%, undershooting consensus expectations of 3.0%. The moderation suggests that recent price pressures — partly driven by the Iran-related shock — are likely to prove transitory. In turn, the data reinforces the view that the ECB may not need to tighten further as inflation continues to move toward its 2% target.

 OpenAI Stake: OpenAI, the developer of ChatGPT, is reportedly considering granting the Trump administration a 5% equity stake as part of its efforts to navigate regulatory hurdles ahead of a potential IPO. The move follows recent public remarks by the president expressing interest in securing ownership in the company. If executed, this arrangement could set a precedent for other firms pursuing public listings, particularly in sectors facing heightened regulatory scrutiny. The arrangement reflects a theme in our outlook of the growing government intervention in AI.

 Russian Escalation: Moscow launched significant airstrikes on Kyiv and other major Ukrainian cities on Wednesday, killing at least 17 people and injuring around 70. The attacks come amid an intensifying exchange of strikes that have targeted urban centers and signal a potential shift toward broader escalation. This dynamic suggests the conflict may be moving beyond a more contained, military-focused phase toward a wider campaign with fewer constraints on civilian infrastructure.

 German Tax Cuts: German Chancellor Friedrich Merz has unveiled a 10 billion EUR ($11.44 billion) tax cut package aimed at jump-starting the economy. The proposal targets middle- and lower-income households. For example, a family with two children earning 60,000 EUR ($68,600) annually would receive a tax reduction of approximately 600 EUR ($686). The plan would be partially funded by raising the top marginal tax rate from 45% to 47%. Politically, the measure appears designed to shore up support among more populist factions as the ruling coalition faces declining approval.

Note: Due to the holiday, there will not be a Comment published tomorrow. We hope everyone enjoys the celebrations for the 4^th!

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