Federal Reserve Chairman Kevin Warsh is unlikely to oversee a rate hike at this week’s Fed meeting for at least three reasons.
First, Mr. Warsh personally does not seem to agree with the argument for raising interest rates. Second, raising rates would undermine the work of his task force. And third, raising rates risks putting him on the wrong side of unpleasant politics with the Trump administration.
Still, Mr. Warsh faces a divided Federal Open Market Committee, with perhaps three or four of the dozen or so voting members prepared to push for an immediate rate hike. Investors see a nearly 40% chance of a rate hike this week, according to CME FedWatch. Warsh will face a difficult situation on the committee if he simply keeps interest rates the same, but how he deals with each of these three main rationales will reveal.
First, Mr. Warsh probably doesn’t want to raise interest rates at this point and hasn’t promised anything. He pledged to end “forward guidance,” the practice of promising the Fed a specific policy on interest rates in advance. This means he won’t say in advance how he plans to vote during the FOMC meeting.
But Warsh does offer some clues about his so-called reactive function, how he and the Fed more broadly interpret and respond to incoming data. Warsh is looking specifically at how to process data about two major economic forces weighing on the economy: soaring energy prices due to the Iran war and rising costs for semiconductors and electricity as companies build out their artificial intelligence capabilities.
Gasoline and diesel prices have skyrocketed in recent days following the collapse of the ceasefire between the United States and Iran. In his July 15 Senate testimony, Mr. Warsh said in rather dismissive terms that “certain price shocks occur at certain prices that we have no control over.” In other words, there is little the Fed can do in the short term to expand capacity at maxed-out U.S. refineries.
This could be a problem if higher energy prices appeared to be driving up broader prices across the economy, but June consumer price index data released just before Warsh’s speech showed that broader prices were actually falling before the recent resumption of hostilities.
Some of Mr. Warsh’s colleagues at the Fed have warned about the potential for higher prices for things like semiconductors and electricity as tech companies spend billions to build out artificial intelligence capabilities. But as with energy, Warsh told the Senate he wasn’t necessarily concerned. “I don’t think a one-time price change will necessarily lead to inflation, because I think there will be such a supply response,” he said.
Warsh said the Fed needs to determine whether this particular change in supply and demand constitutes the type of inflation that would need to be addressed by raising interest rates. In other words, the FOMC’s responsive function under his leadership will become clearer after this meeting.
The second point is closely related. Warsh has established a series of task forces aimed at permanently and accurately answering these types of questions, with reports expected to be submitted in late 2026 or later. Is artificial intelligence accelerating growth without raising prices? Does the Fed have the right idea about inflation overall? There are task forces for both.
If Mr. Warsh votes in favor of a rate hike at his second FOMC meeting as chairman, he will effectively concede that argument. The purpose of the special committee was to raise political funds. Warsh’s playing now will help him achieve his goals later.
Another of Mr. Warsh’s task forces is working on issues such as how often the Fed should hold press conferences. Another reason he can’t skip this.
Conversely, if Mr. Warsh were to raise rates unexpectedly, it would be an important signal that he perceives the current inflation situation and the risks to the Fed’s credibility as serious enough that he is prepared to undermine his signature reform efforts.
Third, there are direct political considerations. Mr. Warsh has said loudly and often that he will decide on interest rates, regardless of what President Donald Trump thinks. But that doesn’t mean Warsh can completely ignore Trump.
Mr. Warsh may add more allies to the Fed’s board. The next opportunity to acquire this right will come when former Chairman Jerome Powell leaves the board. He can remain in office until January 2028, but could leave sooner if the Fed’s inspector general issues a certificate of sanity following an investigation into the Fed’s renovation overruns, and if the Trump administration’s Justice Department chooses to let him go following a report.
Warsh said the report is expected to be submitted this summer. Mr. Powell may decide it is appropriate to resign as a result of this.
But that will require President Trump to resist the urge to antagonize him, which is already proving difficult. President Trump said Monday that he wants to lower interest rates, but pointed to problems with the Fed’s board. Mr. Trump made a vague reference to Mr. Powell and said, “I would need the consent of some people who probably have bad intentions.”
Politics here is delicate. Mr. Warsh needs to make sure that Mr. Trump does not have any openings to attack Mr. Powell. A rate hike this week would play into a conservative conspiracy theory that Treasury Secretary Scott Bessent has secretly described Mr. Powell as the “shadow Fed chairman.” And even if Mr. Powell actually resigns after the IG report, Mr. Warsh will likely want some say in the nomination of Mr. Powell’s successor, a Trump-led one. Mr. Warsh cannot completely ignore the president.
Mr. Warsh could provide clues at the meeting about the IG report as well as a second external investigation into the Fed’s handling of the 2023 banking crisis, which some fear could be used as a pretext to remove directors.
It is impossible to predict with certainty what the Fed will do, simply because its outcome is no longer predetermined. Warsh will have to deliver his first interest rate hike in office sooner or later. But for now, he has strong reasons to hold off just a little longer.
