Kevin Warsh's testimony to Congress offers 'some heat but not a lot of new light' on the outlook for interest rates
Federal Reserve Chair Kevin Warsh testified during a Senate hearing on Thursday.
Over the past several years, Wall Street and Washington, D.C., have grown used to being able to reliably predict what the Federal Reserve would do at its interest-rate meeting, weeks before the gathering took place.
But now we're in a new era. Instead of guiding the market toward the likely outcome of the upcoming meeting, the new Fed chair, Kevin Warsh, has remained silent about the central bank's plans.
This leaves investors and analysts to ruminate amongst themselves. There's reason to believe the Fed will continue to hold rates steady, as it has so far this year. Inflation is showing signs of cooling, and Warsh, when he has spoken about rate policy, hasn't appeared eager to hike. At the same time, several other Fed officials have signaled support for raising rates. And of course, Warsh could deliver a surprise for investors and policymakers.
"It's a little tricky with Warsh coming in, because he's not necessarily going to give you the same guidance that past Fed leadership would have. Typically at this point, you would assume the Fed would try to guide the market one way or another - either to price a hike or stay on hold," Jeremy Schwartz, senior U.S. economist at Nomura, said in an interview.
Derek Tang, co-founder of LH Meyer/Monetary Policy Analytics, agreed there is lingering doubt in the market.
"I think people are antsy about it, because they just don't know whether Warsh will come up and surprise us," Tang said.
In a note to clients, Douglas Porter, chief economist at BMO Capital Markets, said Warsh's testimony to Congress this week "offered some heat but not a lot of new light" on the outlook for interest rates.
Signs of a hike
In two days of testimony on Capitol Hill, Warsh talked tough, saying that the Fed has "no tolerance" for elevated inflation and that the last five years of high inflation "will be a thing of the past." He stopped short, however, of signaling that he would support an interest-rate hike.
Meanwhile, other Fed officials indicated they would support raising rates. Dallas Fed President Lorie Logan became the first Fed official to publicly advocate for higher rates this week.
"I currently believe modestly higher interest rates would better balance the outlook and risks for the Fed's dual-mandate goals," Logan said in a speech Thursday, referring to strong employment and low inflation.
And Cleveland Fed President Beth Hammack, in a post on LinkedIn, said she was hearing from businesses that are urging the Fed to hike rates to curb inflation, as well as from consumers who can't make ends meet and feel a growing sense of despair about higher prices.
Some Fed watchers, like former Richmond Fed President Jeffrey Lacker, think it's time for the central bank to raise rates. Lacker said Warsh could forge a "center hawk" coalition to do that.
"I would say go at this meeting. Raise rates at this meeting. Take action. I mean, it's getting to the point where it's just all talk and people are wondering, well, why aren't you doing something about inflation?" Lacker said in an interview with journalist Kathleen Hays published on her Substack, Central Bank Central, on Thursday.
Aditya Bhave, head of U.S. economic research at BofA Global Research, said in an interview that Warsh "would comfortably have enough votes on the committee to raise rates."
In June, the Fed's "dot plot" forecast of interest rates showed a dramatic shift toward tightening, with nine officials penciling at least one rate hike this year and six penciling in more than one. Only three months earlier, no officials had projected a rate hike.
Bhave said that he thinks five of the 12 voting members of the Fed's interest-rate committee favor hikes.
Fed still divided on path forward
Despite the case for hiking rates, there's reason to believe the Fed will keep rates unchanged at this month's meeting.
The Fed's dot plot showed there's a camp of nine officials who think the Fed can be patient about inflation.
And New York Fed President John Williams said this week that he sees several signs that inflation has peaked.
Earlier this week, markets seemed bullish on the odds of a rate hike in July after Fed governor Christopher Waller warned that higher rates might be needed if inflation stayed elevated. But inflation data released after Waller spoke was cooler than expected, and markets have settled into a view that July is too soon for a hike.
Bhave at Bank of America said he thinks Warsh will wait until September before raising rates three times by the end of the year. Traders in derivative markets see a better than 50% chance of a rate hike at the September meeting.
Many economists, however, believe the Fed won't hike at all this year. They see inflation trending lower in coming months.
"For Warsh, yelling about it but not hiking because inflation is coming down is the best of all worlds," said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott.
Marc Giannoni, chief U.S. economist at Barclays, forecasts that the Fed will keep rates unchanged until the end of 2027.
"Our baseline forecast, we think, is in line with the [Federal Open Market Committee], which is that inflation should be moderating in the second half of the year," Giannoni said in an interview.
Schwartz at Nomura said he thinks Warsh is more inclined toward lower rates.
"We think he's laid out a lot of reasons why the Fed might want to remain on hold, whether it's downplaying some of the strong inflation data we've seen recently or talking about the disinflationary impacts in the future of higher productivity," Schwartz said.
"So he hasn't given any indication that he's inclined to hike rates," he said.
-Greg Robb
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(END) Dow Jones Newswires
July 18, 2026 07:00 ET (11:00 GMT)
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