Warsh has not promised any special action on interest rates, but he has recently argued that the Fed will have to raise rates unless inflation slows. He likely left flexibility for him and other Fed members to keep rates unchanged if they choose not to act at their Sept. 15-16 meeting. But his Fed leadership is under intense scrutiny both inside and outside the organization, and if he fails to act despite repeated inflation warnings, it will be difficult to convince markets next time that he is serious.
Economists will find ways to slice the new CPI data. Mr. Warsh’s challenge is that his economic philosophy particularly frowns upon quickly considering individual data points, such as the latest CPI statistics. In this he contrasts with Fed officials such as Christopher Waller and New York Fed President John Williams. Both parties were in the final stages before the meeting and were likely to wait for remaining data before deciding whether a rate hike was necessary.
Warsh, by contrast, has repeatedly warned against putting too much faith in short-term predictions. “Forecast accuracy remains an aspiration” for the Fed, he said at the Kansas City Fed’s annual symposium in Jackson Hole, Wyoming, last month.
“Inflation is above our 2% goal,” Warsh said in a speech in Jackson Hole on Aug. 28. “Therefore, the Fed’s primary focus now should be on prices.” Warsh downplayed recent improvements in inflation data in favor of a broader view of underlying inflation, he said, based on his reading of data reflected in two major price measures: personal consumption spending and the consumer price index.
“This summer’s PCE and CPI measurements were better than expected, but we cannot say that the underlying trends have improved significantly,” Warsh said in Jackson Hole.
Headline inflation, as measured by the PCE index, rose 3.7% as of the latest data.
Waller, on the other hand, is focusing more on looking at data, preserving the Fed’s tradition of data-reliance. Waller said at a Reuters event on September 3 that inflation could exceed 2%, but added: “Recent data suggests we are finally starting to see signs of disinflation.” “If this continues in the data over the next two weeks, I would support keeping the federal funds rate target at its current setting.” He said he would closely watch Friday’s CPI data for clues.
Warsh, by contrast, has repeatedly warned against putting too much faith in short-term predictions. For the Fed, he said in Jackson Hole, the forecast is “still just a wish.”
The new data may sway Waller and others who still want to wait and see. But if that’s not the case, Warsh will have to make a choice. Will he wait for the Federal Open Market Committee to issue its opinion? Or will he convince Waller and other potential opponents to accept his views?
Waller also offered more personal criticism, calling Warsh’s advice “bizarre.” Perhaps that’s a payback for Mr. Warsh, who has long argued that the Fed under Mr. Waller and others has lost its way, but giving in now would effectively make Mr. Waller, not Mr. Warsh, the Fed’s intellectual center of gravity.
This could have harsh implications for Mr. Warsh’s special committee assessing the future of the Fed, which Mr. Waller rejected behind closed doors, The Wall Street Journal reported.
If Mr. Warsh doesn’t use his influence now, investors will begin to question whether he really has it. And that will inevitably give way to a more uncomfortable set of questions about the Fed chairman’s political loyalties.
President Donald Trump has pressed Warsh to cut rates, even as he insists he trusts Warsh to follow his conscience.
Some analysts believe Mr. Warsh has struck a tacit political deal with Mr. Trump not to raise rates ahead of the Nov. 3 midterm elections. Mr. Warsh has been vocal about his independence, and there is no evidence that he considered anything other than his own reading of the economy in determining interest rates. But it remains difficult to escape the shadow of the president who chose him to chair the Fed.
The theory has been that Mr. Warsh is content to let the market do his job because he is tied to interest rates. Market interest rates have risen across the yield curve since Mr. Warsh took over as Fed chair, with the 10-year Treasury yield jumping to 4.95% as of early Friday morning.
Mr. Warsh made ambiguous statements at a press conference in July that led some to believe that he believed the market would tighten financial conditions. Warsh said the Fed hasn’t done much since he became chairman. “The market has done quite a bit.”
But it’s not clear what Warsh really meant. Another interpretation is that Warsh is saying that markets can now react to the economy without having to second-guess what the Fed will do next. In this view, interest rates rose because the economy became stronger, a point also echoed by New York Fed’s Williams.
Warsh is now in a position to justify his views or reignite the debate about what really motivates him. If Mr. Warsh is not seen as intelligent and decisive, there is a good chance that investors, the public, and the chairman’s own colleagues will expect someone else to be the shadow chairman. It could be Mr. Trump, Treasury Secretary Scott Bessent, or Mr. Waller. Markets are likely to increase yields on long-term bonds in light of the uncertainty.
The Fed’s September meeting will be crucial in determining whether Mr. Warsh is considered the chairman he wants.
