Hot inflation data sets up a Fed rate hike. What happens if Warsh wavers
Hotter-than-expected inflation data has turned next week’s Federal Reserve meeting into a defining test for Chairman Kevin Warsh. His choice now is whether to raise interest rates, or look like he isn’t in control of the central bank he leads.
Friday’s consumer price index data makes the trade-off acute for Warsh. Core consumer prices, which strip out the effects of food and energy prices, rose 0.3% in August, more than expected. Headline inflation climbed 0.4% for the month, putting it 3.4% above the level a year ago.
Warsh hasn’t promised any particular action on rates, but he recently laid out a case that the Fed will need to raise interest rates if inflation doesn’t moderate. He arguably preserved the wiggle room to keep rates flat if he and the rest of the Fed choose not to act at their Sept. 15-16 meeting. But with his leadership of the Fed under intense scrutiny from inside and outside the organization, not acting after his repeated inflation warnings will make it harder for him to convince the market he is serious next time.
Economists will find ways to slice the new CPI data. Warsh’s challenge is that his economic philosophy specifically frowns on making quick turns on individual data points such as the latest CPI print. That puts him in contrast with Fed officials such as Governor Christopher Waller and New York Fed President John Williams. Both entered the final stretch before the meeting more inclined to wait for remaining data before deciding whether a rate increase was necessary.
Warsh, by contrast, has repeatedly warned against putting too much confidence in short-term forecasts. He said last month at the Kansas City Fed’s annual symposium in Jackson Hole, Wyoming, “accuracy in forecasting is still just an aspiration” for the Fed.
The new data may sway Waller and others who would rather still wait and see. But if it doesn’t, Warsh will face a choice. Does he wait for the Federal Open Market Committee to come around to his view? Or does he muscle Waller and other potential dissenters into accepting his view?
Some analysts have decided Warsh has made a tacit political arrangement with Trump not to raise rates ahead of the Nov. 3 midterm election. Warsh has been vocal in proclaiming his independence, and there is no evidence he has considered anything but his own reading of the economy in making rate decisions. But it’s still hard for him to escape the shadow of the president who picked him as Fed chair.