On inflation, it’s put up or shut up time for new Federal Reserve chair Kevin Warsh
The Fed’s monetary policy committee kicks off a two-day meeting Tuesday and will announce its interest rate decision on Wednesday afternoon amid high expectations from investors of the first hike in more than three years. Kevin Hassett, a top White House economic official, has been clear in public comments recently that is not Trump’s preference, particularly less than two months before the midterm elections.
But failure to hike interest rates now given the state of the economy could let inflation surge even higher, as well as deal a blow to the credibility of the Fed and Warsh himself, analysts said.
“It’s going to be kind of like the boy who cried wolf,” said Omair Sharif, founder and president of Inflation Insights, an economic advisory firm. “And I don’t think you want to be in that position in your first . . . four months as Fed chairman, where essentially the market just doesn’t believe you.”
In a major speech last month in Jackson Hole, Wyo., Warsh declared that “the Fed’s predominant focus right now should be on prices.” Combined with a Labor Department report Friday of a significant 0.4 percent increase in the consumer price index in August, investors upped their expectation for a rate hike announcement this week.
A leading indicator based on futures trades on the Fed’s interest rate has jumped since Friday to a greater than 90 percent probability for a small, quarter-percentage-point interest rate hike.
The Fed changes its benchmark short-term rate to try to influence the economy, raising it to make borrowing more costly to try to tamp down prices and lowering it when the economy is struggling to spur more spending.
“I think it would be advisable to hike rates,” said Boston College economist Brian Bethune. “[Inflation] is not getting better. It seems to be actually getting worse.”
The Fed aims to keep annual inflation at about 2 percent. But post-COVID supply chain problems, federal pandemic relief spending, and the Ukraine war caused the annual consumer price index to vault to a four-decade high of 9.1 percent in June 2022.
Under Powell, a Republican who Trump appointed as chair in 2017, the Fed was late to respond to that inflation surge, believing it was only temporary. But after jumping into the fight, the Fed aggressively raised interest rates and brought inflation down close to normal in early 2025.
Then Trump’s high tariffs pushed inflation in the other direction, and the Iran war this year added an extra boost by strangling oil exports from the Middle East. Diesel fuel recently hit a record high, and gas prices in Massachusetts jumped 13 cents a gallon since last week. On Monday, the average price in the state was $4.34 cents, and about the same nationally, according to AAA.
“It’s mainly fuel, gasoline, and that’s obviously spilling over more,” Bethune said. “It spills over directly into airline fares . . . and then eventually it will feed through to other costs in the economy.”
The annual consumer price index in August was 3.4 percent, and economists expect more upward pressure in September given the continued rise in gas prices.
But Hassett, director of the White House’s National Economic Council, has noted that core inflation — which excludes volatile energy and food prices — is running lower and said he doesn’t believe there’s a reason for the Fed to raise interest rates right now.
“The president will have an opinion about it, I’m sure,” Hassett said on Bloomberg TV on Friday. “He believes that there’s plenty of room for interest rates to go down and he voices that opinion while respecting the independence of the Fed. And so I would guess if the Fed makes a big move, that the president will have something to say about it.”
Democrats charge that Trump doesn’t respect the Fed’s independence, pointing to his extraordinary efforts to try to fire Fed Governor Lisa Cook, an appointee of President Biden, and to pressure Powell. Massachusetts Senator Elizabeth Warren led the charge against Warsh’s nomination, saying he would be nothing more than a “sock puppet” doing Trump’s bidding. All but one Senate Democrat voted against his confirmation.
The Fed chair is only one of 12 voting members of the central’s bank rate-setting committee, but carries large sway. Failure to support an interest rate hike this week would be a bad look for Warsh, Sharif said.
“One of the concerns about him in general was he said what he needed to say to get on the committee, and now he’s not hiking because he doesn’t want to upset the White House,” Sharif said. “I just think it would look pretty bad for him professionally.”
Not increasing rates right now also could backfire.
If the Fed is viewed as acting politically and not in the best interests of the economy, investors would be likely to push up rates on their own, partly out of fear that inflation won’t be reined in, said Donald Kohn, a senior fellow in economic studies at the Brookings Institution think tank and a former Fed vice chair.
The Fed’s decision only directly affects the short-term rate that domestic banks use to lend money to each other they hold at regional Fed banks. Investors and bankers generally follow the Fed’s lead on longer-term rates, such as for car loans and mortgages.
“If he talks to the president, and we’re told he does, he can argue that . . . one of the worst things that could happen here would be him not following through” on the expected rate hike, Kohn said of Warsh. “Not doing it might be worse for the Republicans and for the mortgage market than doing it.”
Hassett also has asserted in recent interviews that the Fed tends not to want to take action too close to an election.
“They’ve hiked rates ahead of an election only a couple times all the way back to 1913,” he told “Fox News Sunday.” “And so I think if you want an independent Fed, then one thing the Fed does is it stays out of the way of elections.”
But Kohn does not recall ever hearing an upcoming election given as a public reason for a Fed interest rate decision.
“The pressure will be on Kevin Warsh and the [committee] to explain very clearly why they didn’t raise rates,” Kohn said if that were to happen. “And the election cannot be one of those explanations.”
Sharif believes that Warsh and Fed officials will put aside any concerns about Trump and announce a rate hike on Wednesday.
“I just think it would be so, so difficult to sit on your hands now and not do anything,” Sharif said.
Jim Puzzanghera can be reached at jim.puzzanghera@globe.com. Follow him @JimPuzzanghera.