Federal Reserve Chair Kevin Warsh is unlikely to raise interest rates at this week's FOMC meeting. Doing so would risk prejudging the outcomes of the task forces he established to rethink inflation, artificial intelligence, data, and the Fed's communication. Warsh has previously suggested that a one-time price shock from energy or AI-related demand is not necessarily inflationary. The decision also carries political risk, as Warsh must navigate his relationship with President Donald Trump, FOMC member and former Fed Chair Jerome Powell, and future Board of Governors appointees.
Where to start
Federal Reserve Chair Kevin Warsh is unlikely to push for a rate hike at this week's Fed meeting, for at least three reasons. First, Warsh himself does not appear to be convinced by the arguments for raising rates. Second, a rate hike would undermine the work of his task forces. Third, it could place him in a politically difficult position with the Trump administration. However, Warsh faces a deeply divided Federal Open Market Committee (FOMC), where roughly three to four of the twelve voting members are prepared to call for an immediate rate increase. According to market data, investors see nearly a 40% chance of a rate hike this week. The fact that Warsh faces significant resistance to holding rates steady at the committee meeting makes his response to these three key arguments highly significant to observe.
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First, Warsh likely does not want a rate hike right now, and he has made no commitments to one. He has pledged to end "forward guidance"—the Fed's practice of pre-committing to a specific interest rate path. This means he will not reveal his voting intention before the FOMC meeting. However, Warsh has provided some clues about his "reaction function"—how he and the Fed as a whole interpret and respond to new data. He has specifically commented on how to interpret data on two major economic pressures: rising energy prices due to the war in Iran, and rising semiconductor and electricity costs from businesses building AI capabilities. Gasoline and diesel prices have surged recently after the US-Iran ceasefire agreement collapsed. In a July 15 Senate testimony, Warsh remarked in a rather dismissive tone, "Specific price shocks occur at specific prices, and those prices are beyond our control." In other words, in the short term, the Fed can do little to expand capacity at US refineries that are already running at full capacity. A spike in energy prices could be a problem if it appears to be causing broader price increases, but data on the Consumer Price Index (CPI) for June, released before Warsh's remarks, showed that broader prices were actually falling before the recent resumption of hostilities. Some of Warsh's colleagues at the Fed have warned that tech companies, when investing heavily in AI capabilities, might raise prices for semiconductors, electricity, and more. But, as with energy, Warsh told the Senate he is not necessarily concerned. He does not "believe that a one-time price change is necessarily inflationary, because I think the supply side will respond." Warsh stated that the Fed will have to determine whether this specific supply-demand shift is the type of inflation that requires a rate hike to address. In other words, under his leadership, the FOMC's reaction function will become clearer after this meeting.
Where to start
Second, this is closely related to the above. Warsh has established a series of task forces, scheduled to report by the end of 2026 and beyond, aimed at accurately answering these types of questions on a lasting basis. Is AI boosting growth without pushing up prices? Is the Fed's overall thinking on inflation correct? There are task forces for both aspects. If Warsh voted for a rate hike at his second FOMC meeting as chair, he would effectively be admitting the arguments against those positions. The whole point of setting up the task forces is to build political capital. By buying time now, Warsh will be in a stronger position to achieve his goals later. Another of Warsh's task forces addresses issues including how often the Fed should hold press conferences. This is another reason he cannot skip this one. Conversely, if Warsh were to unexpectedly raise rates, it would be a significant signal that he believes the current inflation situation—and the risk to the Fed's credibility—is so severe that he is willing to undermine his own signature reform efforts.
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Third is the direct political consideration. Warsh has repeatedly and publicly stated that he will make interest rate decisions independently, regardless of President Donald Trump's views. But this does not mean Warsh can completely ignore Trump. Warsh needs more allies on the Fed's Board of Governors. The next opportunity to gain an ally will come when former Chair Jerome Powell steps down. Powell can remain in his role until January 2028, but he might leave earlier if the Fed's Inspector General issues a clean report on its investigation into cost overruns at the Fed's renovation, and if Trump's Department of Justice chooses not to take action against Powell after the report is released. Warsh has said the report is expected this summer. Powell could then choose to resign. But this requires Trump to restrain his impulse to oppose him—which has proven difficult. Trump said on Monday he wants lower rates but noted the Board of Governors is a problem. "You need to get approval from some people who might have bad intentions," Trump said, an apparent reference to Powell. The political game here is very delicate. Warsh must avoid giving Trump a reason to attack Powell. A rate hike this week would fuel the conservative conspiracy theory that Powell is actually the "shadow Fed chair," as Treasury Secretary Scott Bessent has described. Even if Powell does resign after the Inspector General's report, Warsh will want a say in who replaces him—and that nomination is controlled by Trump. Warsh cannot completely ignore the President. Warsh may give hints at this meeting about the Inspector General's report and another external investigation into the Fed's handling of the 2023 banking crisis—the latter of which some fear could be used as a pretext to remove Board members. It is impossible to predict the Fed's moves precisely, for the simple reason that the outcome of the Fed's decision is no longer predetermined. Warsh will eventually have to make his first rate hike. But for now, he has compelling reasons to hold off and wait a little longer.
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