Federal Reserve's chairman Kevin Warsh faces a 'no-win' situation on rates

By Colby Smith

Kevin M Warsh cleared a crucial hurdle at his first appearance as the Federal Reserve’s chairman at its annual conference in Jackson, Wyoming. 

He offered his most comprehensive views to date about the state of the economy. He cleared up confusion about the central bank’s commitment to getting inflation down to its 2 per cent target after sending mixed messages the month prior. And he acknowledged that the Fed might have “work to do” to make good on that pledge, suggesting a readiness to raise interest rates if price pressures do not ease. 

But the path ahead for Warsh is a precarious one. Financial markets now see a quarter-point increase at the central bank’s next meeting on September 15-16 as more likely than not, leaving Warsh with a tough decision whether to follow through with action. Another month of beni-gn inflation data will alleviate the pressure on him to raise rat-es in September. But as the mar-ket blowback to his last meeting in July showed, the onus will be on him to explain how doing nothing aligns with his intolerance for elevated inflation. 

A rate increase next month would help to underpin the seriousness around Warsh’s inflation pledge. Delivering that just before mid-term elections, however, would create an immediate showdown with the Trump administration. “He has mul-tiple targets on his back,” Maurice Obstfeld, a senior fellow at the Peterson Institute for International Economics and former chief economist at the International Monetary Fund, said on the sidelines of the conference. “It’s a no-win situation.” 

Warsh on Friday sounded like many of his fellow policymakers who had grown impatient about the slow pace of progress on taming inflation after half a decade of it overshooting the target. He made clear that with the labour market stable, the Fed’s focus was chiefly on tackling inflation. Raising rates by three-quarters of a percentage point, the argument goes, would ensure there is some downward pressure on economic activity, helping in part to snuff out price pressures. 

Warsh had a plea during his speech on Friday that people in attendance who know him well said the public should heed. “Just don’t call it forward guidance,” the chairman quipped when outlining the contents of his speech. 

“He was very clear: He is not telling us what he’s doing at the next meeting,” said Kristin Forbes, a former Bank of England official who is now at the Massachusetts Institute of Technology. Still, Forbes conceded that Warsh was in a “tricky situation” as he contends with markets reading it as such. 

Austan D Goolsbee, the president of the Chicago Fed, said in an interview that the right decision came down to whether the data showed the most recent bout of inflation, caused partly by the Iran war and President Trump’s tariffs, was persistent or just a one-time increase in the level of consumer prices. “The reason to wait, just in theory, would be if that inflation is going to go away on its own, then you easily could generate a recession and you didn’t need to,” Goolsbee said. 

Susan C Collins, president of the Boston Fed, also acknowledged in an interview that the inflation data was “mixed,” suggesting that higher rates are not a foregone conclusion but remain a real possibility if there is not a discernible improvement soon. 

Increasing rates would put Warsh immediately at odds with Trump, who has gone to great lengths to pressure the Fed into lowering rates. Trump handpicked Warsh, after running an elaborate audition process that hinged on finding someone who would support his views. The administration’s desire for lower rates was on full display this past month when the Treasury secretary, Scott Bessent, embarked on surprise interventions amid a sharp rise in longer-term government bond yields.