Hotter-than-expected August inflation data has turned the Federal Reserve's September 15-16 meeting into a test of Chairman Kevin Warsh's credibility. Warsh has said inflation must stay the Fed's top focus, while other officials favor waiting for more data before raising rates.
Federal Reserve Chairman Kevin Warsh faces a decision that could define his tenure: raise interest rates at next week's meeting, or risk looking like he isn't in control of the central bank he leads.
Friday's consumer-price index data made that trade-off sharper. Core prices, which strip out food and energy, rose 0.3% in August, more than expected. Headline inflation rose 0.4% for the month, putting it 3.4% above its year-ago level.
Warsh has staked out inflation as his priority
Warsh hasn't committed to any specific action on rates. But he laid out a case in August that the Fed will need to consider a rate hike if inflation doesn't moderate, language that gives him room to hold rates flat but also raises the stakes of standing pat now.
Warsh said in an Aug. 28 speech at the Kansas City Fed's Jackson Hole symposium that inflation is running above the Fed's 2% target and that prices should be the Fed's predominant focus right now. He said this summer's PCE and CPI readings, though better than expected, don't tell him underlying inflation trends have meaningfully improved. Headline PCE inflation is up 3.7% as of the most recent data.
Other officials favor waiting
Warsh's stance contrasts with Fed Governor Christopher Waller and New York Fed President John Williams, who entered the final stretch before the meeting more inclined to wait for further data. Inflation may be above 2%, Waller said at a Reuters event on Sept. 3, but according to Reuters: "recent data suggests we are finally seeing some signs of disinflation". He added he would support holding the federal funds rate at its current setting if that trend continues.
Waller has also made personal criticisms of Warsh's advice. Waller has dismissed Warsh's task forces to assess the Fed's future, the Wall Street Journal reported.
Political pressure adds to the stakes
President Donald Trump has pushed Warsh to cut rates, while saying he trusts Warsh to follow his own judgment. Some analysts believe Warsh has made a tacit arrangement with Trump not to raise rates before the Nov. 3 midterm election, though there is no evidence he has considered anything beyond his own economic reading in setting policy.
Market interest rates have risen across the yield curve since Warsh became chairman, including a sharp rise in the 10-year Treasury yield to 4.95% as of early Friday. At his July press conference, Warsh said the Fed hasn't done much since he became chairman while the markets have done quite a bit, remarks some read as a sign he expects markets to tighten financial conditions on his behalf.
If Warsh doesn't act after his repeated inflation warnings, investors will start asking whether he can actually sway the rest of the committee, and whether the Fed chairman's judgment is driving policy at all.
Source: CNBC
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