AFP, WASHINGTON
US Federal Reserve chief Kevin Warsh will be caught between a rock and a hard place as he chairs his first meeting of the central bank’s rate-setting committee this week.Inflation is at a three-year high, but Warsh still faces unrelenting pressure from the White House to lower interest rates.The bank’s 12-member Federal Open Market Committee (FOMC) is to begin a two-day meeting tomorrow and is widely expected to hold rates steady as the effects of US President Donald Trump’s war on Iran course through the world’s largest economy.
US President Donald Trump, right, shakes hands with the new Federal Reserve Chairman Kevin Warsh during Warsh’s swearing-in in the East Room of the White House in Washington on May 22.
Warsh, who was picked by Trump, was sworn in last month and has an ambitious and wide-ranging reform agenda.He has previously expressed support for lowering rates — in line with Trump’s demands — but will likely face resistance from a divided committee. At the FOMC’s most recent meeting in April, the Fed held rates steady at 3.50 to 3.75 percent, but the decision saw four voices of dissent — the most since 1992.
Analysts expect the FOMC to deliver a similar decision this month, though with debate expected on whether to change the Fed’s guidance on what its next move could be — a rate hike or a cut.“He was appointed as Trump’s pick, because Trump probably was influencing him to cut rates,” Allianz Trade senior economist Dan North said.“I don’t see him being able to do that now, especially with inflation data and job growth data, and what the people on the FOMC said last time around with their dissents.”The Fed has a dual mandate to keep inflation to its long-term two-percent target while ensuring maximum employment. It typically achieves these goals through interest-rate decisions — cutting borrowing costs to spur economic activity or raising them to cool prices.Before the US-Israel war on Iran sent energy prices skyrocketing, markets had priced in at least one rate cut by the end of this year.With inflation flaring due to the war, however, the next move is now forecast to be a rate hike by December, according to CME’s FedWatch tool.That will be sure to anger Trump, who has launched an unprecedented assault on the Fed’s independence with a criminal probe against Warsh’s predecessor and attempting to fire another Fed governor.Last week, responding to strong US job growth figures that suggested the Fed should focus on inflation, Trump said he still wanted lower rates but would let Warsh “make that decision.”The FOMC decides by majority vote, and even if Warsh argues for a cut, he must convince at least six other policymakers to join him.At his confirmation hearing, Warsh said he favored “messier meetings,” where policymakers could have “a good family fight.”“He’s stepping into an environment that’s already messy,” North said. “I don’t think it’s the family fight he was talking about.”EY-Parthenon chief economist Gregory Daco said Warsh was unlikely to try to make wholesale changes at the meeting — his first chance to sit with the entire committee and “share his perspective on the economic landscape.”Warsh has proposed reducing the amount of information the Fed communicates about its decisions: cutting out forward guidance and projections.“In this first meeting, my guess is that he will withhold his projection, but not necessarily change the way projections are published,” Daco said.While most analysts expect rates to be held steady at this meeting, opinions vary wildly on what the Fed’s next move could be — whether war-fueled inflation will need to be addressed, or if it can be treated as temporary.“Delaying rate hikes is riskier today than it was as the economy emerged from the pandemic,” KPMG chief economist Diane Swonk said. “The persistence of inflation is the hand that Warsh has been dealt; nothing can wish it away.”As for whether Warsh will succumb to Trump’s pressure, “that’s something that’s going to have to be tested,” Daco said.
