Fed Set to Hold Rates as Warsh Refuses to Tip His Hand
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- The Federal Reserve is expected to hold its benchmark rate in the 3.50-to-3.75% range on Wednesday, though the outcome is unusually uncertain because Chair Kevin Warsh's 18 FOMC colleagues were evenly split at their last meeting on whether to hike rates this year.
- Kevin Warsh, who took over as Fed chief in May, has said he has "no tolerance" for inflation running above the Fed's 2% target for more than five years, and views financial markets as one of the most important sources of information for central bankers.
- Consumer price inflation slowed to 3.5% year-over-year in June from 4.2% in May, while oil prices fell sharply this week on renewed hopes of a U.S.-Iran ceasefire — factors easing immediate pressure to hike.
- Dallas Fed President Lorie Logan and Cleveland Fed President Beth Hammack have publicly indicated support for higher rates to put inflation back on the 2% path, with economists expecting at least one of them to dissent if the majority leaves rates unchanged.
- Financial markets are pricing roughly a one-in-three chance of a quarter-point hike, with Barclays noting that speculation is mounting that Warsh could deliver a surprise move to reinforce anti-inflation credibility and prove he is not caving to presidential pressure.
- President Donald Trump, who hand-picked Warsh hoping for easier monetary policy, told reporters Monday that the U.S. "should have the lowest interest rate in the world" but has publicly blamed other Board members for tying Warsh's hands.
Why it matters: A surprise rate hike would mark the "regime change" Warsh promised and put to rest doubts he is yielding to Trump's pressure for lower rates — but with markets pricing only a one-in-three chance of a move, delivering one risks jolting investors who came in expecting the status quo.
