Critics say Kevin Warsh's determination to cool prices gains isn't sufficient
Treasury Scott Bessent, shown here during a Cabinet meeting at Camp David last Friday, defended Fed Chair Kevin Warsh's approach on Tuesday.
Fed Chair Kevin Warsh's strategy of keeping mum about his approach to interest-rate policy has done little to assuage investors' and economists' concerns about his ability to combat inflation. But Warsh's supporters say he shouldn't have to explain himself.
"I began on Wall Street in 1984, and you never knew what the Fed was going to do, and you had to be positioned accordingly, and you actually had to do your own work," Treasury Secretary Scott Bessent said in an interview with CNBC on Tuesday.
"I think of this as a detox, for both the financial markets and financial journalists," Bessent said of Warsh's strategy of not hinting about the direction of rate policy.
Bessent's comments are the latest high-profile salvo in a battle between Warsh's supporters, who say his quieter approach is a necessary change for the Fed, and his critics, who argue that it's creating doubt about his ability to bring down prices, despite his tough talk on inflation.
Warsh has said repeatedly that he is committed to bringing inflation back down to the Fed's 2% target. But the Fed voted 9-3 to keep interest rates unchanged in a range of 3.5%-3.75% for the fifth straight meeting.
"This is a period of watchful thinking," Warsh told reporters.
"What did raise many an eyebrow was Warsh's tough talk on inflation, accompanied by no real indication that any actions were on offer anytime soon," said Douglas Porter, chief economist at BMO Capital Markets.
Mark Cabana, head of rates strategy at BofA Global Research, likened Warsh to a person saying they are firmly committed to losing 15 pounds - but without exercise, diet or using GLP-1 drugs. It is nice to be resolute, Cabana said in an interview on Bloomberg on Monday, but no one will believe you unless they know how you intend to do it.
"You can't fool the bond. You can't do it," Cabana said, referring to the bond market, an important signal of how investors view the health of the economy. "The bond will see through it, and that is our interpretation of what happened last week."
Most economists think getting inflation under control means raising interest rates. Although the Fed operates independently from the White House, investors and policymakers are watching to see how closely Warsh hews to the position of the Trump administration, whose officials have been pushing rate cuts for months.
Opinion: Warsh's Fed is failing to stick to its own principles for good monetary policy
Former New York Fed President Bill Dudley said the rise in long-bond rates signaled a loss of credibility for the U.S. central bank. This makes the Fed's job harder, because the market demands higher rates when it doubts the central bank.
"There really was virtually no information about how the Federal Reserve is thinking about monetary policy, how the Fed is likely to react to incoming information in terms of how they adjust monetary policy. The silence from Warsh was really quite deafening," Dudley said in a Bloomberg interview on Monday.
Torsten Slok, chief economist at Apollo, said the lack of clarity about how to lower inflation pushed yields higher "because there is now a risk that it may take longer or involve a policy mistake."
Still, some argue that Warsh's approach is being subject to more scrutiny than those of other Fed chairs because of his perceived closeness to President Donald Trump.
"There are always deep suspicions that Kevin Warsh is in his bones Trump's man, and he will do Trump's bidding. And it's not until he demonstrates that's not true that people will probably truly trust him," Robert Brusca, chief economist at FAO Economics, said in an email to clients.
Bessent's comments show the White House is sticking by Trump's Fed pick, even though the rise in bond prices raises the cost of government borrowing and could slow the economy.
"I think Chair Warsh wanted to maintain optionality for optimal outcomes. I am sure under his leadership, the Fed will balance between their growth mandate and their inflation mandate," Bessent said.
The Treasury secretary said he wasn't convinced that interest rates needed to rise.
"What does an increase in the short-term rate actually do?" Bessent asked, noting that lifting the Fed's benchmark rate wouldn't impact the economy for a year or more.
"Core inflation away from the fast-moving segments that are impacted by energy have been very quiescent, and I think we are going to continue to see that," he said.
-Greg Robb
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