By Howard Schneider
WASHINGTON, June 15 (Reuters) – New Federal Reserve Chairman Kevin Warsh has talked at length in recent years about the U.S. central bank’s balance sheet, the need to say less about interest rates and why it should not dip into issues like climate change.
A Fed press conference on Wednesday, though, will mark his first substantive comments from the chairman’s perch about what’s happening with inflation, unemployment and the economic outlook as he makes a rhetorical turn from the abstract words of a policy analyst to the concrete, potentially market-moving words of the world’s most important central banker.
Inflation, in particular, seems stuck more than a percentage point above the Fed’s 2% target, and Warsh’s characterization about whether and when it is likely to fall will be a key first step in the evolution of monetary policy under his leadership.
It’s one that investors will take as a cue about the likelihood of higher rates that many now see coming this year.
What might have been otherwise temporary price shocks, triggered by the Trump administration’s import tariff hikes and elevated oil prices due to the U.S.-backed war with Iran, now threaten a more persistent inflation problem. Meanwhile, the U.S. labor market is close to full employment, hiring has rebounded, and Warsh’s colleagues in the Fed’s regional districts hinted in a recent report at building wage pressures.
The press conference immediately following the end of the Fed’s June 16-17 policy meeting will provide Warsh an opportunity to address those economic cross-currents as he builds a narrative about the risks he sees facing the central bank and how he plans to frame its response.
Warsh, who succeeded former Fed chief Jerome Powell about a month ago, “has been much more vocal in terms of the balance sheet, he’s been much more vocal on communication strategy. When it comes to what’s your theory of change for inflation, what’s your view in terms of the current posture of monetary policy, those things are a big black box that we’re going to start to open up,” Ed Al-Hussainy, portfolio manager for fixed income and macro at Columbia Threadneedle, told reporters last week.
There will be much to unpack: Warsh’s assessment of the impact of tariffs on goods prices; whether the recent oil price shock will persist and spread; whether, as recent data suggest, the improvement in inflation that had been coming from slowing rent prices has run its course.
Those are the sorts of issues Powell, who remains on the Fed’s Board of Governors, would address directly in his press conferences. Warsh has said he doesn’t want to provide too much information about the central bank’s likely next interest rate moves. But where he draws the line between “forward guidance” and offering his outlook for the economy or inflation will be an important aspect of his opening press conference.
“I think Warsh is going to punt on the question” of where inflation is heading and what the Fed might need to do about it, said Christopher Hodge, chief U.S. economist at Natixis CIB Americas, who still expects the central bank to cut interest rates rather than raise them, though the timing remains uncertain. Despite a “neutral-to-hawkish tone,” Hodge said, “I don’t think he will preclude cuts, but the onus will be on the data to prove that the energy shock is past us.”
AVOIDING A ‘BAD LOOK’
The Fed is widely expected on Wednesday to hold its benchmark interest rate steady in the 3.50%-3.75% range, where it’s been since December. In addition to a policy statement, it will also issue updated quarterly economic projections from its policymakers. Warsh’s press conference will begin shortly after.
The new Fed chief dislikes some of the central bank’s current communications tools, including the projections and accompanying “dot-plot” chart of rate expectations, but would need broad consensus among his 18 fellow policymakers before eliminating or changing it.
Warsh is not obligated to submit projections of his own, and doing so might reveal him to be more aligned with the central bank’s mainstream monetary policy thinking than former Fed Governor Stephen Miran, who was a defender of the sharp rate cuts called for by President Donald Trump during his brief stay on the Fed’s board. Miran’s low-hanging dot will now disappear.
More significant is whether the Fed drops policy statement language indicating its next rate move is likely to be a cut in favor of more neutral wording opening the door to a possible hike. Three policymakers dissented in favor of such a shift at the April 28-29 meeting. Others, including influential Fed Governor Christopher Waller, have since said they now support the move after a recent jump in hiring eased their concerns about the labor market’s health. The change would also align with Warsh’s preference to offer less forward guidance.
Warsh faces a possible communications challenge if, for example, the Fed’s policy statement adopts a more neutral tone while the dot-plot chart shows many of its policymakers expect rate hikes by the end of the year.
The median policymaker projection is expected to show the Fed on hold through 2026, moving away from the quarter-percentage-point rate cut policymakers had anticipated in their previous two outlooks as a continuation of an easing cycle that began in 2024 when inflation seemed on track to fall to the 2% target.
Yet if, as expected, the median outlook on inflation is also marked higher without an anticipated rate hike, it will raise questions about whether the Warsh-led Fed is at risk of making the same mistake as under Powell in regarding the forces driving prices higher as temporary and likely to fade without higher borrowing costs. Indeed, the policy rules that Warsh called “aspirational” tools while at Stanford University’s Hoover Institution now almost universally suggest rates should rise.
Warsh, in the run-up to his nomination for the top Fed job by Trump, sketched out ideas about why inflation, and therefore rates, could fall, from the impact of his plans to lower the Fed’s $6.71 trillion balance sheet to productivity improvements from the artificial intelligence boom. He has also suggested inflation may be mismeasured and be running lower than reported.
How much he leans on those ideas to caution about rate hikes will offer a first glimpse of his approach as the Fed’s leader, and whether it seems to differ all that much despite his sharp criticism of its recent decisionmaking process.
“It’s a bad look for the Fed to say inflation is much too high, but we are going to ignore it because if you exclude these five things it will go away,” said William English, former head of the Fed’s monetary affairs division and now a professor at the Yale School of Management. “He does not want to get too far in front of that.”
(Reporting by Howard Schneider; Editing by Dan Burns and Paul Simao)
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