United States (US) Federal Reserve Chairman Kevin Warsh dislikes giving any guidance about the likely path of US interest rates, but elevated inflation, $100-a-barrel oil and his own emphasis on the need to deliver price stability and pay attention to signals from financial market pricing appear to leave little doubt about what’s next.
The US central bank will announce its policy decision at 1800 GMT on Wednesday, following the end of a two-day meeting. Financial markets are betting heavily that Fed policymakers will lift their benchmark rate by a quarter of a percentage point to a 3.75-4 per cent range and signal further tightening ahead.
Such a decision could land Warsh, who has run the Fed’s rate-setting committee since starting the job in May, in a tight spot. US President Donald Trump picked Warsh with the explicit expectation that he would cut interest rates, but so far has not blamed him for failing to deliver, saying it is the fault of his “political” fellow central bankers. It’s not clear how the president would react to a rate hike so soon before the November elections, in which Trump’s Republican Party is defending slim majorities in Congress.
A decision to raise rates, especially if accompanied by policymaker projections for another increase this year, as some analysts now expect, could also force Warsh into delivering at least a bit of a steer on the rate path and his own expectations for the economy — unless he is comfortable leaving the door wide open to further increases.
“Warsh will also need to walk a fine line in his remarks if he still aims to provide no forward guidance,” TD Securities economist Oscar Munoz wrote. “If the Fed decides to tighten policy, he will certainly be asked about future rate hikes. It is fairly clear to us that more tightening would be in the pipeline if the Fed goes the hiking route in September. It will be interesting to see how the chairman goes through that balancing act.”
A week ago, there was far less certainty about this week’s outcome. “Give disinflation a chance,” quipped Fed Governor Christopher Waller at a Reuters Next event in early September, citing cooler inflation readings in June and July that appeared to carve a path towards the Fed’s 2 per cent goal within a reasonable timeframe. “I think that we have to wait and see,” New York Fed President John Williams said earlier this month.
But hotter-than-expected inflation readings last week may disappoint both Williams and Waller and add to the dismay of the three regional Fed bank presidents — the Cleveland Fed’s Beth Hammack, the Dallas Fed’s Lorie Logan and the Minneapolis Fed’s Neel Kashkari — who already felt in July that the Fed ought to be raising rates and dissented from the decision to hold steady instead.
Several other Fed policymakers have said they need to see disinflation “soon” or they, too, would support a rate hike.
US consumer price inflation, excluding energy and food, rose 0.3 per cent last month from the previous month, the Bureau of Labor Statistics reported, far more than is consistent with inflation at the Fed’s 2 per cent goal.
Coupled with oil prices that have soared above $100 a barrel amid renewed hostilities in West Asia, the latest data will not add to confidence that underlying inflation is moving towards 2 per cent “clearly and at sufficient speed”, as Warsh told global central bankers in Jackson Hole, Wyoming, last month that he wanted to see.
At the end of the day, the chair’s repeated warnings on inflation intolerance risk institutional credibility without action to back them up, said JPMorgan economist Michael Feroli, who projects that the Fed will raise rates on Wednesday, although he thinks it’s a closer call than the roughly 85 per cent chance priced in by futures markets.
Scotiabank economist Derek Holt believes raising rates now is the wrong move but thinks it will happen regardless, given what Warsh said. “Chair Warsh has probably boxed himself in with his high deference to markets,” Holt said. “If you don’t hike when it’s priced, then when?”
Economists say that with most Fed policymakers likely to defer to the preferences of the still-new Fed chair, Warsh could bring along a majority to support a hold. But given Warsh’s own repeated declarations that inflation is the Fed’s responsibility, the disappointingly hot inflation reading in August and Trump’s recent signal that the war in Iran — and therefore high oil prices — may continue for another couple of months, he may not want to.
