JACKSON HOLE, Wyo.-Fed Chairman Kevin Warsh put to rest some concerns raised about his inflation-fighting strategy but set up a potentially bigger test three weeks from now. If the Fed raises interest rates, he risks infuriating the White House weeks before the midterm elections. If he holds, he could revive the doubts that Friday's speech here quieted.
The central bankers gathered in the Tetons this weekend arrived unsure how much the Fed's new chairman would tell them about how he reads the economy. Warsh had been criticized after last month's meeting, including by several conference attendees, for not explaining how the Fed's current stance would bring inflation down.
He gave a fuller account on Friday. Two observations in particular from Warsh's speech pointed toward raising rates next month, which investors now think more likely than not. One was that Warsh would be hard-pressed to call financial conditions restrictive.
The other was that the summer's better inflation readings hadn't convinced him the underlying trend was improving. Rates are supposed to bring inflation down by making borrowing costly. If borrowing isn't costly and inflation isn't falling, rates aren't high enough.
Before Friday, the Fed's default was to hold unless the data made a case to move. Warsh's speech reversed it, said Donald Kohn, a former Fed vice chairman. "He's changed the presumption to they'll raise rates unless the data suggests it's not necessary," said Kohn, whose reading was shared by others at the Kansas City Fed's annual symposium.
That means the decision will turn on developments before the Sept. 15-16 meeting, especially the August consumer-price index on Sept. 11. Warsh has said he doesn't put much weight on any single reading, but cooler data could turn two prior encouraging months into a trend.
A weak enough report would settle it, Kohn said. If the data say a move isn't necessary, the Fed shouldn't move, and investors shouldn't object. A firm reading, on the other hand, could undercut the argument that inflation is on its way to the central bank's 2% target. If the Fed held steady anyway, it would revive the doubts about Warsh's willingness to act that Friday's speech had quieted.
While this is the kind of data-point dependence Warsh criticized before he ran the place, it is also a natural outcome for a chairman who wants every meeting to be decided in the room rather than in advance.
Some professional forecasters, including at Barclays and Societe Generale, revised their expectations for Fed policy on the basis of Warsh's speech on Friday, and now expect hikes in September and December.
Other investors and analysts treated the speech as an inkblot test that reinforced their prior views. Those who thought the Fed should have raised rates in July heard a chairman laying the groundwork to move and identifying himself with the Fed's most hawkish contingent. Those who think a hike would be a mistake heard a chairman repairing July's communications confusion and reassuring markets he takes inflation seriously, without committing to a decision the data don't yet demand.
Kristin Forbes, a former Bank of England policymaker who moderated a panel at the conference, said investors should be careful reading the speech as a signal. Warsh has been explicit that he isn't pre-committing, she said. "The door is open either way, and he's been very clear that's how people should be pricing it," she said.
A chairman determined to show he isn't offering guidance might have reason not to move next month, if only to stop investors parsing every speech for a signal, said Forbes.
On Friday, Warsh defended July's decision with reasons to postpone a call-awaiting new information on supply chains, investment flows and geopolitics-rather than make the arguments some of his colleagues did to say why the current stance is appropriate. Absent soft August data, holding in September would put him back where July left him, explaining a decision without a satisfying rationale.
"If he doesn't explain it well, he will lose credibility," said Thomas Hoenig, a former president of the Kansas City Fed.
A rate increase next month would fall just weeks before the midterm elections in early November and would undercut the administration's message that inflation has been brought under control. President Trump hasn't put the same public pressure on Warsh that he applied to former Fed Chair Jerome Powell, whom he ridiculed for months to try to pressure into rate cuts. He is still trying to remove Fed governor Lisa Cook.
Trump has suggested in recent months that Warsh would prefer to leave rates alone and is being pushed by others on the committee, and the president's top economic advisers have said inflation, excluding volatile energy prices, has improved.
Hoenig said it would be naive to think political pressure doesn't register. "I don't care who you are. It's unavoidable," he said. "We all put it aside, but it's always there." Warsh and his colleagues have said they don't take politics into consideration.
Warsh leads a committee that is split. Three officials dissented from last month's decision and at least two others without a vote said they also thought rates should rise. These officials are worried that inflation is likely to fester regardless of what the August data show, in part because tariffs, the conflict in the Middle East and the scale of AI investment will keep pressure on prices. They also see a risk that elevated inflation and strong growth will sustain higher price growth.
Others aren't opposed to raising rates eventually but see a mistake in moving if monthly price readings continue to break in a more favorable direction, as they did in June and July.
A third group sits somewhere in between. A few who supported July's decision could now lean in favor of hiking, leading to more dissents than the three last month if the Fed holds steady in September.
Chicago Fed President Austan Goolsbee is among those who see the question as unsettled. What matters to him is what kind of inflation this is: a run of supply shocks, which are historically short-lived and don't have an obvious policy response, or demand running ahead of what the economy can supply. If overheating from the artificial-intelligence boom spreads to the broader economy, he said, "that's just a regular old central bank needing to respond to the business cycle. There's no ambiguity of what has to happen."
The complication is that the shocks keep arriving. Goolsbee said the tariffs weren't one and done: New rounds piled onto earlier ones, courts undid some, and still more have followed.
Former central bankers at the conference said the speech was important because it showed Warsh could take criticism and adjust. He reaffirmed the Fed's 2% target after fuzzing it up last month and didn't repeat an argument he had made last year while under consideration for the job, that AI would drive prices down and let the Fed cut faster. "The AI fairy didn't show up," said Kohn.
Warsh's description of how he reads the economy and what does and doesn't concern him mattered most, said Kohn. "It builds a foundation for more communication like that in the future."
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