Federal Reserve Chairman Kevin Warsh faces a tough head count this week as he and his fellow policymakers decide on immediate and future interest rates.
When the market has sharpened in the near-certain time the percentage points increase in the vote on Wednesday, it is not at all clear how wide will be the margin between the 12 Federal Open Market Voters Voters.
Moreover, Warsh must decide how to order the move: Will this be rare one-and-done in hikes, will there be others coming or will the chair maintain a cryptic posture in not trying to guide the market one way or another?
“With the market priced the way it is, it would be surprising if they come in and do nothing,” Bill Dudley, former president of the New York Fed, said in a CNBC interview. “It will damage his credibility because it will basically be talk, no action.”
Indeed, as of Monday evening, futures traders were pricing in a more favorable 92% chance of a rate hike this week, as well as a more than 75% chance the FOMC will follow through in December with another move, according to CME Group’s FedWatch measure. Fed funds, the overnight lending rate, is currently at 3.50% to 3.75%.
The greater possibility follows last week’s fuel price and inflation data that showed prices continued to rise in August. Both trends follow Warsh’s comments a few weeks ago that the Fed would be forced to act unless there were more concrete signs that inflation had fallen back to the central bank’s 2% target.
However, there are significant complications.
Wait or act?
For one thing, the Fed has historically looked at the kinds of trends that are driving current inflation. Economists generally agree that much of this year’s increase is due to tariffs and energy supply shocks from the Iran war, both of which have an uncertain impact on the long-term trajectory of inflation.
“We don’t see a strong economic case for raising the funds rate,” Goldman Sachs economist David Mericle said in a client note. “We think that the entire overshoot of 2% can be caused by one-time factors whose impact can disappear.”
However, Goldman changed its call from no change at this week’s meeting to a hike, mainly because the firm’s economists think market expectations will force the Fed to move.
What will also happen to the FOMC which voted 9-3 to hold at its July meeting is another matter.
The three dissenters — regional presidents Lorie Logan of Dallas, Beth Hammack of Cleveland and Neel Kashkari of Minneapolis — all supported a quarter-point increase two months ago, when the Fed last met. If the position is not changed, and no public comment is suggested, it means that the other four members will have to switch the vote from hold to rise.
Arguably the most watched voter is Governor Christopher Waller.
In a public comment sent on September 3, Waller voiced support for holding more in this meeting, although with the usual caveats about watching data to confirm that the trend of disinflation continues. Usually, they just ask for patience instead of rushing up.
“What is the cost of waiting for one meeting? Hiking 25 basis points, one meeting now, will not bring [consumer price index] up to 2%,” he said.
The CPI for August actually shows headline inflation running at a rate of 3.4%, although the core rate, which excludes food and soaring energy costs, was 2.4% lighter, down 0.1 percentage point from July.
Waller isn’t just advocating patience — New York Fed President John Williams told CNBC less than two weeks ago that a “wait-and-see” approach seemed to make sense. Earlier in the summer, Williams, whose perch at the New York Fed is traditionally considered part of the influential “troika” at the central bank, said he thought inflation had peaked.
Also in recent comments, Governor Michael Barr expressed concern about temporary inflation being held deeper and said he would be open to increases, not adjusted.
Break the FOMC
So who will join the dissident July three?
Warsh is generally expected to be part of the hiking group, considering he spoke in Jackson Hole, Wyoming last month. Gov. Lisa Cook said in early August that she was “ready to act” to address inflation. Conversely, Philadelphia Fed President Anna Paulson and Chicago’s Austan Goolsbee also suggested a more patient approach.
That would leave Gov. Philip Jefferson, who is vice chairman; Jerome Powell, the former chair, who has kept a decidedly low profile since stepping down from the top spot, and Michelle Bowman, who said a little on monetary policy in the summer and last related talk was in May, when he also expressed concern about unnecessary hiking.
And then there’s the bigger wildcard: Should Warsh speed up the case, will those on the fence cross over to his side to present a united front?
The voting margin will not only reveal the depth of the intellectual divide in the committee between those who think inflation is temporary and those who believe price pressures are entrenched. It will also send an important signal about the effectiveness of Warsh’s leadership at the Fed.
“It should be noted that, if the Fed does raise rates this week, it may not seem, in retrospect, like a close call,” David Kelly, chief global strategist at JPMorgan Asset Management, said in a weekly market note. “If the majority on the committee agrees on the decision to hike, other members may join to present a more united front to the public and the President.”
In such cases, Kelly said the final vote can see two, one or no dissents.
From there, the market will look to the Fed’s “dot plot” updates. The box stated, anonymously, rate expectations for the 19 participants in the meeting, though Warsh held off on the point for the June update.
Investors will look at how much confidence there will be for two increases this year, as well as the outlook for 2027. It will also present the first view in 2029. The Fed almost never increases or cuts only once but further in the cycle, because policymakers consider additional measures as ineffective.
A 10-8 split in favor of one increase – assuming Warsh’s disdain for forward guidance and nonparticipation in updates – would indicate that “some participants may be ambivalent about the first increase and some may want to keep pushing market expectations higher,” Mericle wrote.
“But we see majority risk for two hikes if more participants than expected see hikes this week as a normal response to higher oil prices and AI demand and the start of a series of rate hikes,” he said.
In the event of a close split in the committee, attention will then turn to Warsh’s Wednesday evening news conference, and how the chairs delivered FOMC sentiment.
Dudley, the former head of the New York Fed, said “the Fed needs to explain how it thinks about the economy.”
“Now [Warsh has] they just have to follow it up with action,” Dudley said. “If they do that, I think they’ve solved the problems they made in the first two press conferences.”