The US Federal Reserve’s new chief, Kevin Warsh, came into office sounding like a hawk.
That means he emphasised the need to keep inflation down over the bank’s other mandate, maximising employment.
But since he has taken over, Warsh has presided over two meetings, keeping rates unchanged in both, despite elevated inflation.
The Fed’s policy-setting committee voted last month to hold rates steady, although three members dissented, calling for a quarter-point increase.
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US inflation was 3.5 per cent in June, above the Fed’s 2 per cent target.
Rate-hike bets were tempered last week after data showed the US economy unexpectedly shed jobs in July as employers slowed hiring.
The biggest clue as to the Fed’s direction of travel will come later this week when inflation numbers for July come.
“The prevailing narrative is that inflation remains ... high, but is not that far from the Fed’s 2 per cent goal,” said Bob Edwards, chief investment officer at Edwards Asset Management. “A benign CPI [consumer price index] report and no September rate hike would give this market permission to run faster.”
Warsh’s stripped-back communications style – he is against forward signalling – compounds matters, making forecasting more difficult.
If Warsh and his fellow policymakers opt for a rate hike in September, they will draw the ire of US president Donald Trump, who appointed Warsh specifically to lower rates to boost economic growth.
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Trump also won’t want a rate hike in the run-up to the November midterm elections, with Republicans looking vulnerable.
Warsh, however, seems to be playing for more time to see if tariffs and/or oil prices are causing a more profound upswell in inflation.
The numbers on Thursday will provide more information, but both these forces are creating a lot of noise for policymakers and Warsh to navigate.
