Christopher Hodge, Head Economist for the U.S. at Natixis, forecasts the Federal Reserve will hold interest rates throughout 2026 as inflation remains the central bank's primary focus under Chair Kevin Warsh. In an interview with Kitco News, Hodge stated the Fed faces uncertainty distinguishing temporary external price shocks from underlying domestic inflation dynamics, with housing representing 35% of CPI weight and wage pressures running at 3% to 3.5%. Hodge, who previously served as Principal Economist at the New York Fed and Deputy Director of Europe and Eurasia at the Treasury Department, also addressed concerns that Warsh's hawkish opening stance may limit policy flexibility and discussed how U.S. trade and sanctions policies have accelerated central bank gold purchases since 2022.
Natixis Forecasts Extended Fed Rate Pause Through 2026
Hodge stated the Federal Reserve's reaction function is "disproportionately focused on inflation" in both the near and longer term. "The Fed hasn't been at target inflation in over five years now, and the price pressure shocks that we've seen over the past two years, be it from tariffs or now from the energy shock, have moved prices in one direction, and that is up," he said.
The economist explained the Fed must separate one-time external shocks from persistent domestic inflation. "From my perspective, they don't seem to be heating up," Hodge said regarding underlying domestic inflationary dynamics. He noted housing, which represents about 35% of CPI weight, shows subdued real-time measures that will "probably be a little bit softer in the coming months."
Wage pressures account for a large percentage of the super core index. "Wages are running at about 3% to 3.5%. And that's at a level that's consistent with about 2% inflation," Hodge stated. He added, "I think that it's probably the prudent move for the Fed to wait until they have a better understanding about how these exogenous shocks are bleeding through to core before acting at all. And that's why I have an extended pause in my forecast throughout 2026."
Hodge Questions Warsh's Initial Hawkish Positioning
Hodge expressed concern that Chair Warsh may have limited his policy options through his opening statements. "Was Warsh so hawkish in his first meeting, really underlining and putting in bold and italics and an exclamation point that the committee is committed to price stability, especially at the end of the official statement? Is he creating a credibility trap for himself?" Hodge asked.
The economist questioned whether Warsh's emphasis on price stability creates pressure to respond to inflation readings. "If we do get higher than expected CPI for maybe the next two readings, is the Fed going to have to react to that because Warsh sort of painted them into the corner?" Hodge said.
On forward guidance, Hodge noted Warsh "has been pretty parsimonious with any sort of forward guidance." He explained that while forward guidance can be effective, "It's certainly not an effective tool right now" because policymakers "are not certain about what's going to be coming down the road."
Warsh's Historical Policy Stance Shows Consistent Hawkishness
Hodge analyzed Warsh's career positioning on monetary policy. "Warsh has been vocally dovish twice in his career. The first time was when he was a finalist for Fed Chair in 2017. The second time was when he was a finalist for Fed Chair in 2025," he said.
The economist suggested Warsh's recent hawkish statements represent "more of a reversion to the mean about where he's been over his career." Hodge noted Warsh "has pretty consistently said -- maybe not explicitly as he has recently -- that inflation is a choice, and inflation is a function of monetary policy. He repeated those words at his confirmation hearing. He certainly echoed the sentiment at his first FOMC press conference."
Hodge acknowledged Warsh's dovish statements during Fed Chair selection processes may have reflected "speaking to your audience" given President Trump's stated preference for low interest rates. "We've all said things in job interviews that maybe we don't fully believe, but are trying to make the most of," Hodge said.
U.S. Policies Drive Central Bank Gold Demand Since 2022
Hodge stated that while Russia's invasion of Ukraine in 2022 catalyzed central bank gold purchases, U.S. policies have sustained the trend. "The diversification away from the dollar was indeed prompted by events from 2022, but has also been exacerbated by erratic policymaking in the U.S. since," he said.
"The U.S. is a less predictable international partner, especially vis-a-vis trade, so it stands to reason that, to the extent possible, [central banks are] decreasing exposure to the dollar," Hodge explained. He characterized the shift as "more of a 'quiet quitting'" with central banks showing "a lack of reinvestment in dollar positions" rather than outright selling.
Hodge noted that despite reduced demand for official dollar assets, "there is still no substitute for the American private sector, which remains the most dynamic, flexible, and innovative in the world. This should underpin demand for dollars even if demand for official assets is marginally lighter."
FAQ
What is Natixis' forecast for Fed interest rates in 2026?
Christopher Hodge, Head Economist for the U.S. at Natixis, forecasts the Federal Reserve will hold interest rates throughout 2026 as the central bank monitors inflation dynamics and distinguishes temporary external price shocks from underlying domestic inflation pressures.
Why are central banks increasing gold purchases?
According to Hodge, central bank gold demand accelerated following Russia's invasion of Ukraine in 2022 and has been sustained by U.S. trade and sanctions policies that made the U.S. "a less predictable international partner." Central banks are decreasing dollar exposure through reduced reinvestment rather than outright selling.
What inflation metrics is the Fed monitoring?
Hodge stated the Fed is watching housing, which represents 35% of CPI weight, and wage pressures running at 3% to 3.5%. He noted these levels are consistent with the Fed's 2% inflation target and show no signs of overheating in underlying domestic inflation dynamics.
