Warsh Tilts Toward a Rate Hike, but a Sliver of Uncertainty Remains

[Financial News]

The moment of decision is approaching for Kevin Warsh, chairman of the Fed. Despite President Donald Trump’s pressure to cut interest rates, it has become increasingly difficult for him to ignore the course of inflation.
Markets see the probability that Warsh will deliver a 0.25-percentage-point rate hike at the Federal Open Market Committee (FOMC) meeting on the 15th and 16th (local time) as exceeding 85%.

Oil prices began rising after President Trump launched the war with Iran on February 28, putting additional upward pressure on inflation.
The Associated Press, citing estimates from the National Grocers Association (NGA), whose members include 7,500 supermarkets worldwide, reported that fuel costs account for approximately 15% to 30% of grocery prices. In other words, rising oil prices could drive grocery prices up by as much as 30%.
Market expectations that the Fed will be unable to avoid raising interest rates have taken hold after the U.S. Department of Labor released the August Consumer Price Index (CPI) on the 11th, showing that inflation remained stubbornly high and continued to follow a “sticky” trend.
According to the department, the August CPI rose 3.4% from a year earlier, remaining at the same level as in July. Core CPI, which excludes the more volatile energy and food categories, rose 2.4% year on year. Although that was slightly lower than July’s 2.5%, it remained well above the Fed’s 2% target.

According to the Financial Times (FT), economists believe persistent inflation will leave the Fed with little choice but to lean toward a rate hike on the 16th. They expect Warsh to ultimately come into conflict with Trump.
Eswar Prasad, a Cornell University economics professor and former International Monetary Fund (IMF) official, said, “Combined with the latest employment data, this inflation figure is sharpening the conflict between the Fed’s mandate to maintain price stability and the rhetoric of ‘keeping Trump happy.’”
Trump himself brought about this conflict.
After he ordered the war with Iran, the Strait of Hormuz became Iran’s hostage, and Brent crude broke above $100 a barrel. As surging oil prices stirred inflation, a global sell-off in government bonds was triggered, sending bond yields—which move inversely to prices—sharply higher. Yields on long-term U.S. Treasury bonds are also at their highest levels in years.

As a result, the probability of a rate hike at this FOMC meeting, which had been roughly 50-50 just a week ago, has now risen to nearly 90%.
Mike Reid of RBC Capital Markets said, “The August inflation data point the Fed in the wrong direction,” adding, “Even those who favor holding rates steady will turn toward a hike this time, saying that ‘action is unavoidable.’”
Warsh had already said at the Jackson Hole Economic Policy Symposium late last month that “there is work to do,” and the market is now increasingly convinced that rates will rise.
Kurt Lewis of Piper Sandler said, “Now they will raise rates,” adding, “The development that everyone thought would make a hike unavoidable if just one more factor were added has arrived this time.”

Ashi Sheth, chief credit officer at Moody’s, said, “Some market participants who had believed the Fed would hold rates steady if CPI fell have switched to expecting a hike this time,” while noting that uncertainty remains.
Sheth added, “Rather than rising, the inflation data were broadly in line with expectations,” and said, “The possibility that the Fed will wait and see for now remains one of the options.”
Warsh and oil prices are also variables.
Krishna Guha, vice chairman of Evercore ISI, said, “A Fed rate hike next week now appears inevitable,” but noted that some uncertainty remains. Warsh could avoid a hike if he successfully persuades his fellow policymakers, while a sudden change in circumstances could also send oil prices into a decline.

However, a reversal toward lower oil prices appears unlikely. Although prices plunged sharply that day, the decline was attributed to profit-taking, while concerns about supply disruptions have instead intensified. After Iran took control of the Strait of Hormuz, the Houthi rebels in Yemen, backed by Iran, strengthened their control over the Bab-el-Mandeb Strait, the gateway to the Red Sea. After capturing the port city of Mocha, they also seized Perim Island in the middle of the strait.
The two key shipping routes for energy and global trade are now both facing serious disruptions to navigation.


[email protected] Song Kyung-jae Reporter