"Warsh Signals Possible Rate Hike to Tame Inflation, Setting Up Clash With Trump"

Since taking office in May, Kevin Warsh, the chairman of the Federal Reserve System (Fed), has kept the benchmark rate unchanged for two straight meetings. But his remarks that the central bank may need to tighten policy because of inflation have raised the odds of a U.S. rate increase. Experts said Warsh has taken a different view from U.S. President Donald Trump, who wants lower rates, and urged close attention to the September policy decision.
Market analysis using the CME FedWatch Tool on Aug. 29 showed that traders in U.S. rate futures were pricing in a 57% chance that the Fed will raise its benchmark rate by 0.25 percentage point in September. The probability of a hold stood at 43%. The Fed currently keeps its benchmark rate in the 3.5% to 3.75% range and will decide the next move at its regular FOMC meeting on Sept. 15-16.
The odds of a hike surged after Warsh's speech. On Aug. 28, his 100th day in office, he delivered the keynote address at the Fed's annual economic symposium in Jackson Hole. He said, "From the standpoint of price stability, one of our responsibilities, the relevant indicators are becoming more concerning." The Personal Consumption Expenditures Price Index, the Fed's preferred inflation gauge, rose 3.7% in July from a year earlier.
Warsh said, "My standard is this: I need to be convinced that underlying inflation is moving toward the target at a clear and sufficiently fast pace." He added, "If not, then we have work to do. That is our mission, our responsibility, and the task before us." Warsh also argued that the Fed's 2% inflation target, measured by the PCE Price Index, is firm and fixed. He said the central bank bears full responsibility for 65 months of elevated inflation. Overall, he added, it would be hard to describe financial conditions as restrictive.
Markets interpreted Warsh's remarks as a sign that he is open to monetary tightening through either a rate hold or a rate hike. The Wall Street Journal said he strongly expressed his determination to curb inflation and clearly explained how the Fed intends to achieve its price goal.
Aditiya Bhab, head of U.S. economic research at Bank of America, told AP that Warsh needs to act at the September FOMC meeting. He said, "Unless the August employment and inflation data are not very weak, Warsh has a responsibility to carry out a rate hike in September." He added, "Otherwise, he will probably lose the market credibility he gained today."
The problem is his conflict with The White House. Since his first term, Trump has argued for lower rates to ease the debt burden and support the economy, and he has repeatedly pressed Warsh to cut rates as well. In an interview on July 29, Trump was asked whether he was disappointed by Warsh's decision to hold rates steady. He replied, "He is fantastic, smart and wise. I knew he wanted to lower rates." He added, "But he has a board," and said, "It is a very political board, and they want to raise rates."
Eswar Prasad, a professor at Cornell University, told the Financial Times on Aug. 28 that "Warsh has drawn a clear line around his goals and intentions." He added that this would put him in direct conflict with Trump, who is demanding rate cuts regardless of economic data or its consequences.
According to The New York Times on Aug. 29, Maurice Obstfeld, a senior fellow at PIIE, said Warsh is in a bind. He noted that if Warsh raises rates, he will clash with Trump, but if he holds them steady, he could lose market confidence in his commitment to fighting inflation. "He has multiple targets on his back," Obstfeld said. "It is a no-win situation."
[email protected] Park Jong-won Reporter