Key Takeaways:
Fed Chair Kevin Warsh acknowledged the central bank has spent "a lot of time" discussing five years of above-target inflation, signaling continued focus on price pressures as colleagues push for higher rates.
Federal Reserve Chair Kevin Warsh said the central bank has devoted "a lot of time" to discussing five years of persistently high inflation, as internal divisions over whether to raise rates intensify ahead of this week's policy meeting.
"We have spent a lot of time discussing the high inflation of the past five years," Warsh said, according to a transcript of his remarks. "We discuss price increases from supply shocks."
The Fed is expected to hold its policy rate at 3.5 percent to 3.75 percent when the Federal Open Market Committee concludes its two-day meeting Wednesday, a level unchanged since December. Yet the consensus may fray: CME FedWatch data shows traders pricing a 66 percent probability of a hold and a 38 percent chance of a hike, an unusually wide gap for a meeting eve. The personal consumption expenditures price index, the Fed's preferred inflation gauge, rose 4 percent in May from a year earlier — double the central bank's 2 percent target and up from recent troughs.
"There is a growing sense of frustration with inflation," said Dario Perkins, managing director of global macro at TS Lombard. "After six years of overshooting their target, people are starting to ask difficult questions about credibility."
Internal Divisions Test Warsh's No-Guidance Approach
Warsh's acknowledgment comes as at least two voting members of the FOMC have publicly signaled support for higher rates. Dallas Fed President Lorie Logan said earlier this month that she supported "modestly higher interest rates," arguing that "one month of relief" in prices was "not enough." Cleveland Fed President Beth Hammack wrote on LinkedIn that inflation is "too high" and that business executives in her district were encouraging a rate increase. "For the first time in my tenure, I'm hearing from businesses who say they think we need to take action to curb inflation, and from consumers who can't make ends meet, about a growing sense of despair," Hammack said.
Fed Governor Christopher Waller, a contender for the chair role that Trump ultimately gave to Warsh, said "sternly staring at inflation until it melts before our withering gaze is not an option," a comment directed at Warsh's decision to avoid forward guidance about rates. KPMG chief economist Diane Swonk said two dissents are expected at the meeting, pointing to Logan and Hammack, both current voting members.
The limited flow of information under Warsh, who has shortened policy statements and eliminated the quarterly Summary of Economic Projections, could amplify the impact of any dissent. "I think dissents are now going to have to be used in a different manner," said Lindsey Piegza, chief economist at Stifel. "Because now we have such limited commentary in the statement, I think officials are going to be forced to use dissent more than ever."
Oil Prices and Tariffs Complicate the Inflation Outlook
The short-lived ceasefire with Iran in June helped ease consumer prices, with the consumer price index dipping to an annual rate of 3.5 percent from a three-year high of 4.2 percent in May. But President Trump declared the ceasefire "over" in early July, and oil prices have climbed again. The average price of a gallon of gas in the U.S. now sits at about $4.10, up 23 cents from the prior month, according to AAA data.
Goldman Sachs economist Ronnie Walker said the uptick in oil prices is "challenging what had previously looked like a quite favorable near-term inflation outlook." The bank's analysis shows that nearly 60 percent of PCE index categories are increasing at annual rates above 3 percent, far above the 37 percent average from 1990 to 2019 when inflation was generally anchored around the Fed's target.
The PCE index is now around 5.5 percent higher than it would have been had the Fed hit its 2 percent goal consistently since adopting the target in 2012 — an outcome that damps spending power across the economy. The June jobs report added to the uncertainty, with the U.S. economy adding 57,000 positions, well below expectations, while the prior two months blew past forecasts.
Warsh has said that artificial intelligence could reproduce the 1990s experience of high growth with low inflation, an approach he has compared to former Fed Chair Alan Greenspan, who died in June at age 100. Greenspan presided over a decade-long economic boom but was later criticized for keeping rates too low and supporting deregulation that contributed to the 2008 financial crisis. At his swearing-in, Warsh praised Greenspan and said one of his goals was to dial back the Fed's communications — an approach closer to Greenspan's opaque style than to the forward guidance of Warsh's immediate predecessors.
The next inflation reading, the June PCE report due later this week, will provide the first test of whether the ceasefire collapse has reversed the price relief seen in June. If inflation broadens further, Warsh's no-guidance approach may face its most serious challenge yet from his own colleagues.
This article is for informational purposes only and does not constitute investment advice.
