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New Fed Chair Pressured on Inflation 08/27 06:06
New Federal Reserve chair Kevin Warsh has brought sharp change in how the
central bank communicates by saying much less than his predecessors about the
economy and inflation.
WASHINGTON (AP) -- New Federal Reserve chair Kevin Warsh has brought sharp
change in how the central bank communicates by saying much less than his
predecessors about the economy and inflation.
But so far, many economists and Wall Street investors haven't been thrilled
with that approach.
On Friday, Warsh has a high-stakes opportunity to address those concerns and
underscore his inflation-fighting bona fides when he gives his speech in
Jackson Hole, Wyoming, during the Fed's annual economic symposium.
What many economists and Wall Street analysts are hoping for is a clear
signal on how he thinks the Fed should handle the stubbornly elevated inflation
that has caused pervasive gloom among many consumers. At his last press
conference, he sowed confusion by ducking repeated questions on whether the Fed
would hike its benchmark interest rate if inflation stays high.
Warsh has said he doesn't want to provide what analysts call "forward
guidance" about whether the Fed will hike or cut rates or stay on hold at
upcoming meetings. He argues that it limits the Fed's flexibility by committing
it to a specific policy. He also thinks financial markets have become too
dependent on such guidance.
Yet some economists argue that he could say more about his views on Fed
policy without tipping his hand about future moves.
"What he needs to do is to clarify the conceptual framework he'll bring to
directing monetary policy," David Wilcox, a senior fellow at the Peterson
Institute for International Economics, said. "He's refused to provide even that
amount of illumination."
Whether Warsh will deliver that clarification Friday is an open question.
Last month, he said he wanted his speech to focus on the "big questions" such
as AI and productivity, demographic changes, and the global economy's response
to shocks from the Iran war.
Looking for clues
How Warsh and the Fed will handle elevated prices is not just an issue for
Wall Street. Even as inflation has cooled after spiking in May and June from
higher gas prices, it remains above the central bank's 2% target. Surveys show
most Americans still see the affordability of necessities such as gas,
groceries, and housing as a top economic issue heading into the midterm
elections.
Notably, interest rates rose when Warsh last spoke publicly at a press
conference July 29, pushing up mortgage borrowing costs after the Fed decided
to keep its benchmark rate unchanged.
"Warsh effectively lost markets when he was speaking," said Gennadiy
Goldberg, head of U.S. rates strategy at TD Securities. "He kept talking more
about bringing inflation down," yet when reporters asked what he would do to
achieve that, "he didn't really have an answer."
Warsh did tell reporters that "any central banker ... is more inclined" to
raise rates "when he or she sees underlying inflation moving higher," which
some economists said was in the ballpark of the broader outlook they were
looking for.
But Warsh hasn't said whether he in fact thinks "underlying inflation" is
worsening, or how exactly he is measuring that. When asked what gauge he would
use to determine if inflation is at the 2% target, he cited the Fed's current
preferred measure -- the personal consumption expenditures price index -- but
he then suggested that could change next year, after the task forces he has
appointed to look at things like data sources and inflation make
recommendations.
And when asked whether he would support higher rates to combat stubborn
inflation, he said they "could well be part of that solution," but then added,
"I wouldn't say it's in isolation." Some Fed watchers took that to mean he
would consider other measures, such as reducing the Fed's vast holdings of
Treasury bonds. Dumping those bonds could push up longer-term borrowing costs,
but over a longer time frame.
Navigating politics
Questions swirling around Warsh have also been intensified by President
Donald Trump's continued calls for lower interest rates. While Trump has
continued to defend Warsh, whom he appointed and who took office May 22, the
president has criticized other Fed officials for supporting higher rates.
Trump has also renewed his efforts to remove Fed governor Lisa Cook, who was
appointed by former President Joe Biden. Replacing Cook would enable Trump
appoint a majority of the seven-member board. Trump tried to fire her last year
but was temporarily blocked by the Supreme Court.
"Politics are adding to the Fed's credibility problems," Diane Swonk, chief
economist at KPMG, wrote in a recent commentary. "That is why his speech ...
later this month matters so much. It is an opportunity for Warsh to demonstrate
his and the Fed's independence from political interference."
Providing a cleaner read on how he would lead the Fed wouldn't take much,
economists said -- just a clearer statement of how the Fed might react if
inflation stays high.
"None of this is radical stuff," said Wilcox, who is also director of
research at Bloomberg Economics. "The problem is he hasn't said any of it. And
people are beginning to be unnerved that he won't utter some seemingly simple
thoughts."
If Warsh does assuage some of these concerns, longer-term interest rates
could decline slightly. Those rates have steadily risen in recent weeks because
of a range of factors, including burgeoning U.S. government deficits and
outsize borrowing by tech firms building AI infrastructure.
The rate on the 30-year Treasury bond reached the highest level in 19 years
last week, prompting an unusual effort by Treasury Secretary Scott Bessent to
buy back bonds and push the yields lower.
When Warsh speaks Friday, "I think just yields not rising would be a
victory," said Derek Tang, an economist at Monetary Policy Analytics, a
consulting firm.
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