Federal Reserve Chair Kevin Warsh is unlikely to push for a rate hike this week, for at least three key reasons. First, Warsh himself does not appear to be convinced of the need for a rate increase. Second, raising rates would undermine the work of his newly established task forces. Third, a hike could drag him into a politically uncomfortable confrontation with the Trump administration.
However, Warsh faces a deeply divided Federal Open Market Committee (FOMC). Among the twelve voting members, approximately three to four are reportedly prepared to call for an immediate rate hike. According to the CME FedWatch Tool, investors see nearly a 40% probability of a rate increase this week. Simply holding rates steady at the committee meeting will be a significant challenge for Warsh. Therefore, the way he articulates these three critical arguments will be a major point of interest.
First, Warsh likely does not want to raise rates now, and he has never made any promises to do so. He has committed to ending "forward guidance"—the Fed's practice of pre-committing to a specific interest rate path. This means he will not reveal his voting intentions ahead of the FOMC meeting. Still, Warsh has provided some clues about his so-called "reaction function"—how he and the broader Fed interpret and respond to new data. Warsh specifically discussed how he handles data on two major forces pressuring the economy: rising energy prices from the Iran conflict and higher semiconductor and electricity costs as businesses build out AI capabilities.
Gasoline and diesel prices have surged recently after the US-Iran ceasefire agreement collapsed. During his Senate testimony on July 15, Warsh described the situation in a relatively muted tone: "Specific price shocks occur on specific prices, which are beyond our control." In other words, in the short term, the Fed can do little to expand the capacity of US refineries, which are already running at full capacity. If soaring energy prices appear to be more broadly pushing up prices across the economy, that could be a problem. However, the June Consumer Price Index (CPI) data, released just before Warsh's testimony, showed that broader prices were actually falling before the recent hostilities resumed.
Some of Warsh's colleagues at the Fed have warned that tech companies, through their massive investments in AI capabilities, could raise prices for semiconductors, electricity, and other inputs. But, similar to his stance on energy, Warsh told the Senate he is not necessarily worried. He does not "view one-off price changes as necessarily inflationary, because I believe there will be a supply-side response." Warsh stated that the Fed would have to determine whether this specific supply-demand shift is the type of inflation that requires a rate hike to solve. In other words, under his leadership, the FOMC's reaction function will become clearer after this meeting.
The second point is closely related to the first. Warsh has established a series of task forces, expected to report by the end of 2026 and beyond, designed to provide lasting answers to precisely these types of questions. Is AI boosting growth without pushing up prices? Is the Fed's overall thinking on inflation correct? Dedicated task forces are working on both questions. If Warsh votes for a rate hike at this, his second FOMC meeting as Chair, he would be essentially admitting that these debates have failed. The entire purpose of creating these task forces was to build political capital. If Warsh buys time now, he will be more likely to achieve his goals later.
Another of Warsh's task forces is addressing issues like how often the Fed should hold press conferences. This is another reason he cannot skip this week's press conference. Conversely, if Warsh were to unexpectedly raise rates, it would be a powerful signal that he believes the current inflation situation—and the risk to the Fed's credibility—is serious enough to justify undermining his own signature reform efforts.
The third point is a direct political calculation. Warsh has repeatedly and loudly stated that he will make his own rate decisions, regardless of what President Donald Trump thinks. This does not mean, however, that Warsh can completely ignore Trump. Warsh may need more allies on the Fed's Board of Governors. The next opportunity to gain an ally will come when former Chair Jerome Powell leaves the Board. Powell can stay on until January 2028, but he might leave early if the Fed's Inspector General releases a "clean" report on the investigation into Powell's office renovation cost overruns, and if Trump's Justice Department chooses not to take action against Powell afterward. Warsh has said the report is expected this summer. Powell is likely to consider resigning after the report is released. But this would require Trump to restrain himself from provoking Powell, which has proven difficult.
Trump said on Monday that he wants lower interest rates but noted that the Fed's Board is a problem. "You need to get the approval of some people who may have ill intentions," Trump said, in a clear reference to Powell. The political game here is delicate. Warsh must avoid giving Trump any ammunition to attack Powell. A rate hike this week would play directly into the hands of conservative conspiracy theories that Powell is actually the "shadow Fed chair," as Treasury Secretary Scott Bessent has described him. Furthermore, even if Powell does resign after the Inspector General's report, Warsh will want a say in Powell's successor—a nomination controlled by Trump. Warsh cannot completely ignore the President.
Warsh may, at this meeting, offer clues about the Inspector General's report and a separate external investigation into the Fed's handling of the 2023 banking problems. The latter has some concerned it could be used as a pretext to remove Board members. It is currently impossible to predict the Fed's exact action for one simple reason: the outcome of the Fed's decisions is no longer pre-determined. Warsh will eventually have to implement his first rate hike. But for now, he has strong reasons to wait a little longer.
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