Warsh Gets a Reprieve — For Now

 

“Whew!” If that isn’t a direct quote from Kevin Warsh it should be. The pressure was building for a rate increase and we all know what Trump feels about a rate increase. Someone had told me that they anticipated that Warsh would try to put through a rate decrease once he was in place at the Fed. I scoffed and said “That’s foolish talk and Warsh is no fool.” What he wants is not to have to raise rates.

Well last month’s CPI report came out and showed inflation cooling to 3.5%, down from 4.2% the month before. That’s still above the Fed’s 2% target, but it’s progress. It is a godsend to Warsh. The cause wasn’t a mystery. Gas prices fell after Trump and Iran reached a memorandum of “understanding” with Trump declaring the Strait of Hormuz open. It was the first monthly CPI decline in two years, and that’s even with the effect of Trump’s tariffs baked in. Gas prices dropped 9.7%, though they’re still up 26.7% year over year.

That drop won’t last, but it buys Warsh some breathing room. With inflation running above 4%, the Fed was going to have a hard time justifying its current rate range. A cut was never going to happen, but a 25-basis-point hike was looking increasingly likely. That pressure has eased heading into the July 29 Open Market Committee meeting. But now that hostilities in Iran have flared up again, gas prices are climbing right back. In Knoxville, I’ve watched regular unleaded jump 50 cents a gallon, with diesel back above $5 at some stations. That’s not a good sign for the Fed’s September 16 meeting. Warsh has to be hoping the conflict is resolved and the Strait reopened by then. Before the CPI report came out, markets had priced in a 40% chance of a rate hike, afterward, that fell to just 17%.

What about the Personal Consumption Expenditures index — the Fed’s preferred inflation gauge? It sat at 4.1% in May, and June’s figures won’t be out until after the Committee meets. It will likely show a similar improvement to the CPI, but July looks less encouraging. The renewed conflict with Iran will push costs back up, and computer prices are already climbing on the back of AI-related spending, up more than 17% for the year. On the plus side, prices have fallen for apparel, used cars, car insurance, and medical care. Trump could ease the pressure on Warsh by rolling back his tariffs, but that seems unlikely.

Warsh testified before the House Financial Services Committee right after the CPI release and cautioned against reading too much into a single month of data. “There might be some who look at this morning’s data and say, ‘Well, mission accomplished, everything is swell.’ That is not my view.” 

The Open Market Committee doesn’t seem to share that view either. Warsh also offered this: “If we get policy right—and we will—the inflation surge of the last five years will be a thing of the past.” True to form, Warsh continues to withhold forward guidance on the Fed’s plans, a break from his predecessors. Asked why, he explained that if policymakers publish economic projections, “We’d then find ourselves sort of taking information that’s consistent with our priors and rejecting information that’s inconsistent. It’s not the way to do things. Being somewhat more circumspect is a better way of calling balls and strikes.”

My goodness, that almost sounds a bit like Alan Greenspan.