Facing stubborn inflation and political pressure from President Donald Trump, Federal Reserve Chair Kevin Warsh is preparing for the most consequential decision day of his nascent term.
Warsh has vowed a much quieter, less interventionist central bank, but a number of challenges now stand in the way. Chiefly, he confronts a standoff with Trump if he fulfills expectations to make way for an interest rate increase, a course correction from his prior instinct to keep rates steady.
The chair will also hold his first press conference following revelations that he and Trump have spoken by phone multiple times since Warsh took the helm of the agency. It also follows a renewed effort by the administration to oust Fed governor Lisa Cook, a signal of how the political pressure that once beset his predecessor is seeping into Warsh’s tenure.
That pressure only complicates escalating calls for the Fed to raise interest rates to tame inflation. A rate hike, however, would directly challenge Trump, who recently told reporters that the U.S. should have the world’s lowest rates and previously led a campaign to reprimand former Chair Jerome Powell’s stewardship of the bank.
Donald Kohn, former vice chair at the Fed from 2006 to 2010 during Warsh’s previous stint as a governor, doubts that Warsh will comment on Trump’s bid to replace Cook, the Fed’s first Black female governor. In the past, the chair notably dodged stating explicitly whether he would defend her if Trump ordered her removal.
Kohn expects Warsh to keep the attention focused on monetary policy and predicts that he will back a hike. “If he does what everyone expects him to do, he will be acting independently. His actions will speak very loudly,” Kohn said in an interview. “He’s already kind of picking a fight with the president by raising interest rates.”
A chorus of others agree about the Fed’s next move. A Duke University survey published Monday of some 30 former Fed officials found a nearly unanimous consensus among previous personnel that the bank should hike interest rates. Meanwhile, a CNBC Fed survey revealed that most market watchers are also bracing for tightening before the end of the year.
“If they would go in tomorrow, not raise rates, give no explanation for why they are still on hold, the narrative will just jump to ‘Kevin Warsh is a sock puppet,’” said Claudia Sahm, a former Federal Reserve economist who also believes the Fed will ultimately support a hike. “They would have to really explain and give a more powerful narrative,” she said.
The trouble for Warsh is that his messaging, or lack thereof, has at times left Wall Street uncertain, with the exception of a speech at Jackson Hole. He is also advocating an end to the practice of offering forward-looking guidance on future decisions, risking the very same sharp market reactions that he intends to avoid.
“His last press conference was very confusing and unclear,” Sahm added. “If they go in and there’s silence, this whole political narrative is just going to swoop in.”
Kevin Hassett, the director of the White House National Economic Council, acknowledged chatter about the impending announcement on Tuesday, vowing to respect Warsh’s ultimate decision. “The market says that they’re likely to hike tomorrow. I would vote against it if I were there, but if they do that, we understand and respect the decision,” Hassett told CNBC.
Those comments struck a more conciliatory tone than Trump’s remarks on Sunday, as he backed lower borrowing rates regardless of the Fed’s formulas about the health of the economy.
Signs that inflation will remain sticky for the foreseeable future are mounting. Hopes of a near-term ceasefire deal with Iran have vanished as the U.S.-Israel war spirals into a regional conflict, driving up oil prices with the disruption of multiple critical waterways. Renewed urgency in Washington to rein in one of the main drivers of economic growth, artificial intelligence, is also spurring industry angst about the outlook for profits in the sector.
A White House official confirmed to MS NOW that Trump and Warsh have talked by phone since he became chair, though they said the two men did not discuss interest rates. They did, however, discuss economic issues, including AI. Warsh established a task force of experts to study the Fed’s understanding of the technology along with other central bank practices.
Kohn, who previously occupied an office near Warsh, said the chairman “seemed to be counting on AI to disinflate the economy” in previous remarks, but Warsh’s speech at Jackson Hole avoided drawing conclusions about the technology’s impact. Trump has notably bragged about AI’s contributions to the U.S. economy, warning against killing the “Golden Goose” amid calls for more regulation.
“The economy has proven itself much more resilient than a lot of economists, myself included, thought it would be to these disruptive events; partly that reflects the very strong demand from AI,” Kohn said. Still, “no one really knows how this thing is going to play out.”
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Author: MOSAEC
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