“Which Kevin Warsh will show up” at this week’s FOMC press conference, Bloomberg Economics wondered. “The recent advocate of lower rates, or the inflation hawk we saw during and after the Global Financial Crisis?”
It wasn’t a rhetorical question, but it could’ve been.
Warsh remains, for now anyway, a reasonably respectable guy in policy circles, and he needs to establish and retain at least a modicum of credibility with markets in his new role. So I doubt he’ll demonstrate the sort of obsequiousness this week you’d get from a Chair Hassett or a Chair Lutnick.
That said, we’re not going to see an arch inflation hawk on Wednesday when Warsh addresses reporters for the first time as Fed chief. He’ll concede what’s obvious — inflation’s too high — and not likely much else.
Warsh probably has some scripted jokes to lighten the mood, but there’ll be no escaping the tension between Donald Trump’s demands for lower rates (Trump will almost surely mention the Fed on social media this week both before and after Warsh’s debut) and four-handle headline CPI.
As discussed at some length here on Saturday, there’s no data-based case for lower rates currently. That’s a problem for Warsh, as is the demonstrable lack of support on the Committee for an easing bias that’s now totally out of sync with macroeconomic reality.
Recall that there were three hawkish dissents at the last meeting, all calling for the removal of that implicit easing bias from the policy statement. More or less every datapoint received since then argues against additional easing, and “thanks” to the war-driven increase in headline inflation, the real policy rate’s now negative.
The figure above shows you market pricing for the Fed trajectory on the eve of the June policy gathering. In the wake of the May jobs report, traders fully priced one 25bps hike this year. Pricing’s only marginally less aggressive now (~80% chance of a hike).
Given all of that — and considering what the April FOMC minutes suggested about the balance of opinions around the table — I’d be very surprised if the easing bias isn’t removed from the statement this week. That’s the only path to a unanimous decision, which I assume Warsh wants from his first meeting.
Dropping the allusion to cuts from the official forward guidance would also take some of the pressure off Warsh during the press conference. Or perhaps it’s more accurate to say not dropping it would set the stage for a presser even more awkward than this one will be already.
The median 2026 marker in the dot plot refresh will likely tip no change to Fed funds this year, a subtlety that’d irritate Trump were he attuned to SEP esoterica (he’s not).
Warsh has designs on reimagining the Fed’s approach to the balance sheet, but as BMO’s Ian Lyngen remarked, it’s far too early for the new chair to get into the rough on that, let alone the deep weeds.
“We suspect that the case for shrinking the balance sheet via SOMA runoff will take months for [Warsh] to convincingly make to the broader Committee,” Lyngen wrote. “Although as a substitute for outright rate hikes (which the White House would surely frown upon), the return of QT would represent a meaningful olive branch to the hawks.”
One final note: Both the headline and core PCE projections will probably move higher in the new SEP, making it even more difficult for Warsh to impart a dovish spin to a hawkish hold.
On Friday I saw this bit:
“Investing.com — President Donald Trump said Friday that he wants to see lower interest rates but will leave the decision on a potential rate cut to Federal Reserve Chair Kevin Warsh during the October meeting.”
So perhaps Warsh will argue inflation is transitory.
With market pricing in ~15bps worth of rate hike by December, shouldn’t a dot plot refresh that indicates no change to Fed funds this year be interpreted as dovish?
We have to assume Warsh and Trump are communicating. There won’t be any surprises on Wednesday. It’ll be a hold, and any “hawkish” messaging will be just noise. Trump might make some noise of his own, but it’ll have been well agreed upon in advance.
The sales pitch is straightforward: you argue, and I say this unironically, that the current level of inflation is transitory, but it’s too high to cut at the moment, so get Hormuz open, and then we’ll start cutting. Warsh has 6 weeks grace.
Warsh has a lot more flexibility than Powell did because Warsh isn’t Powell. Trump took it personally in 18Q4 when Powell wouldn’t stop the “quarter hikes and 50 Bs” (that’s how he phrased it right? I can’t be assed to dig up the actual Tweet), and he never forgot. Warsh can do whatever he wants so long as he warns the boss in advance (and persuades him it’s the smart move politically). Remember that Trump has Last-Person-Spoken-To bias. So long as Bessent and Lutnik have Warsh’s back, Trump will always be sufficiently placated. Reality is way more boring than most people think.
I will be remembering this and watching.
If more ships start getting thru Strait of Hormuz on tomorrow and Tuesday, and Bibi doesn’t unload bombs on Lebanon again in the next 2-3 days, and crude oil plummets 10% or more, then Warsh can claim that oil supply shock may be resolving, inflation is likely to be transitory, and no future rate hikes are being seriously considered. Then the bearish positioning based on inflation fear will need to aggressively unwind and stock indices will be at all time highs again quickly: risk-on. If ships are still not getting thru the strait in next 2-3 days, then the inflation narrative can’t be dismissed by Fed.
This ignores food inflation.
It’s “correct” to ignore foot inflation, because the Federal Reserve Board is going to ignore food inflation.
It’s not “core”.
Unrelated, long scare quotes! It’s a guaranteed “winner.”
Right? Warsh comes equipped with models showing inflation’s kaput given various assumptions about the trajectory of crude, and so long as those trajectories are a semblance of realistic, he buys a (potentially hawkish) hold from the rest of the board who, deep down inside, are too worried about decorum and appearances to blow up the new Chain on day one.
Sheep gonna flock.
There’s always an uncertainty fly in the ointment. In this case it’s a huge fly called Trump. He’s stupid, has no respect for facts and with increasing dementia, has no filter. His tolerance for not getting what he wants is about an hour. Good luck to Warsh with that because Trump is all in on lower rates.