The US Federal Reserve is likely to keep interest rates unchanged at its September meeting despite Chair Kevin Warsh adopting a firm stance on inflation at Jackson Hole, according to Kenanga Research, which sees the first rate cut arriving only in the second quarter of 2027.
Kenanga said Warsh’s first Jackson Hole address as Fed Chair established a standard for future policy action rather than signalling an immediate direction for interest rates.
Warsh stressed that the Fed needs to see underlying inflation moving clearly towards its 2% target and at a sufficient pace, failing which policymakers would have more work to do. However, he stopped short of explicitly calling for higher rates, describing his commitment as one to policy discipline rather than a predetermined decision.
Kenanga cautioned against interpreting the speech as a shift towards a “hike-unless” approach.
“Warsh set out what would justify acting, without saying the bar has been met,” the research house said.
Inflation Remains Broad, But Recent Acceleration Is Narrower
A key part of Warsh’s inflation assessment involves looking beneath the headline numbers at the individual components of the Personal Consumption Expenditures (PCE) basket.
Kenanga noted that over a 12-month period, PCE inflation stood at 3.7%, with 54% of the 199 components recording inflation above 3%.
Over a six-month annualised period, inflation was higher at 4.1%, but the proportion of components exceeding 3% declined to 49%.
While the 54% breadth remains more than 20 percentage points above the pre-pandemic norm of 32% — indicating that elevated inflation remains relatively widespread — Kenanga said the recent acceleration has involved fewer categories.
The distinction is important for monetary policy.
“A broad level argues for keeping policy restrictive. It does not by itself argue for making it more so,” Kenanga said.
The research house believes the combination of faster headline inflation but narrower participation is consistent with a more concentrated, commodity-driven shock rather than a fresh broadening of underlying inflation.
This supports its expectation that energy-driven inflation could ease as Brent crude normalises towards US$80 per barrel.
Financial Conditions Strengthen Case For Caution
The more hawkish element of Warsh’s speech, according to Kenanga, came from his assessment of US financial conditions.
The Fed Chair pointed to credit spreads near the lower end of historical ranges, strong issuance activity, four-quarter growth of around 9% in equipment and intangible investment, S&P 500 profit growth exceeding 20%, and low equity-market volatility.
While acknowledging stress in areas such as housing and agriculture, Warsh concluded that overall financial conditions were not sufficiently restrictive.
Kenanga said the July Senior Loan Officer Opinion Survey broadly supported that assessment, although with some nuance.
Commercial and industrial lending standards were largely unchanged in the second quarter, while demand among large and middle-market companies strengthened. Current lending standards are also easier than banks’ historical midpoint.
“If policy is not restraining credit while inflation remains above target, the case for doing more is straightforward,” Kenanga said.
Nevertheless, the research house distinguished between financial conditions that are already relatively easy and conditions that are actively becoming easier.
September Hold Remains Base Case
Kenanga maintained its expectation that the Federal Open Market Committee will leave rates unchanged at its Sept 15-16 meeting, although it expects more dissenting votes than the three recorded in July.
A 25-basis-point rate increase remains a risk but is not Kenanga’s base case.
Warsh’s emphasis on trends rather than individual or potentially stale data points also suggests policymakers may be reluctant to respond aggressively to a single inflation or employment report.
His assessment of the labour market could similarly reduce the significance of a weak payroll reading on Sept 4. Warsh attributed relatively low monthly job creation partly to barely growing labour supply and low turnover following the post-pandemic rematching of workers and jobs.
With unemployment at 4.1% and the four-week average of jobless claims near multi-decade lows, Kenanga believes a soft payroll number could carry less weight with Warsh than financial markets expect.
Instead, the Sept 11 US consumer price index report is likely to be the crucial test ahead of the FOMC meeting.
Kenanga said investors should focus on the composition of inflation rather than simply the headline figure. Inflation concentrated in goods and energy would support the case for holding rates, while a broadening into shelter, non-housing services and other underlying components would materially strengthen the case for another hike.
Following Warsh’s speech, fed funds futures were pricing close to a 56% probability of a 25-basis-point increase, compared with 48% on Kalshi and 49% on Polymarket.
Kenanga remains more dovish than futures markets.
Kenanga Keeps US$/Ringgit Forecast At 3.95
For currencies, Kenanga maintained its year-end US dollar-ringgit forecast at RM3.95.
The research house noted that hawkish rhetoric without accompanying policy action failed to sustain US dollar gains following the Fed’s July meeting and expects a similar outcome unless September inflation data forces markets to substantially reprice the interest-rate outlook.
Its baseline view is that the US dollar will continue to respond to incoming inflation and labour-market data as well as oil prices.
Over the medium term, narrowing US growth exceptionalism and gradual diversification away from US assets are expected to maintain pressure on the greenback.
However, Kenanga cautioned that a September rate hold would not automatically translate into sustained ringgit appreciation.
“A hold that leaves the market pricing a higher-for-longer path still puts a firmer near-term floor under the USD,” it said, adding that it would not chase ringgit strength solely on the back of a Fed hold.
US Treasury Yield Risks Tilt Higher
Kenanga also maintained its year-end forecast for the 10-year US Treasury yield at 4.50%, with risks tilted to the upside.
The forecast had been raised from 4.30% on July 30 as the term premium continued to rebuild and with Kenanga expecting disinflation to regain momentum only in the first quarter of 2027.
Following Jackson Hole, the repricing was concentrated in shorter and intermediate maturities rather than the long end of the Treasury curve.
The two-year yield climbed about 11 basis points on the day, compared with only around one basis point for the 30-year yield, leaving the 10-year yield at 4.72%.
Kenanga sees limited scope for the 10-year yield to sustainably fall below 4.50%, citing structural bond issuance and corporate investment demand as factors keeping pressure on real yields.
MGS Forecast Under Review
Closer to home, Kenanga said its end-2026 forecast of 3.63% for the 10-year Malaysian Government Securities yield is under review, with risks skewed higher.
However, it does not see evidence of meaningful hawkish repricing in the domestic yield curve.
The recent MGS sell-off has instead been concentrated at the long end, with the curve bear-steepening over the past month. The three-year yield was little changed in the latest week while the 10-year yield increased by about 10 basis points.
MGS also underperformed US Treasuries on both weekly and monthly horizons, which Kenanga said pointed towards supply absorption pressures at the longer end rather than a fundamental change in expectations for Bank Negara Malaysia.
Foreign demand remains supportive, while resilient domestic growth and easing inflation should help contain yields.
For now, Kenanga favours a defensive duration position and the front end of the curve until the September US inflation picture becomes clearer.
BNM Expected To Keep OPR At 2.75%
Kenanga also maintained its expectation that Bank Negara Malaysia will keep the Overnight Policy Rate unchanged at 2.75% throughout 2026.
The research house sees underlying Malaysian inflation as contained while domestic demand remains resilient.
With current inflation risks largely supply-driven, it expects BNM to look through temporary energy-price movements unless they result in broader and more persistent second-round inflationary pressures.
“Nothing in Jackson Hole changes that call,” Kenanga said.
If anything, the narrower breadth of recent US inflation pressures reinforces Kenanga’s view that the current global inflation impulse remains largely supply-driven, leaving its Malaysian monetary policy outlook unchanged.
