Warsh Faces Pressure to Hike Rates as Inflation Persists

Federal Reserve Chairman Kevin Warsh is facing increasing pressure to raise interest rates to combat inflation. The Fed's preferred measure of inflation has exceeded its 2% target for over five years, and core inflation, which excludes volatile energy and food categories, has risen above 3% since 2023.

Warsh has been emphasizing the need to get inflation back to 2%, but has not specified how. In his first news conference as chair last month, he made clear that he wouldn't provide signals about the Fed's next steps, unlike his predecessors. However, in congressional testimony earlier this month, Warsh said the Fed has 'no tolerance' for higher inflation and pledged to deliver price stability.

Markets have taken notice of Warsh's tough talk, with borrowing costs rising. The yield on the 10-year Treasury note briefly topped 4.7% last Thursday, its highest level in about 18 months.

However, some Fed officials are growing impatient with inflation's stubbornness. Christopher Waller, an influential member of the Fed's governing board, said that if core inflation continues to climb, the rate-setting committee 'will need to consider' hiking rates 'in the near term.' Beth Hammack, president of the Cleveland Fed, has also heard from business leaders calling for higher rates and consumers who are struggling with a growing sense of despair.

Despite these concerns, some economists believe that inflation may be peaking. John Williams, president of the New York Fed and vice chair of the rate-setting committee, said this month that 'there are encouraging reasons to expect that inflation has peaked and should edge down in the coming quarters.' However, the resumption of fighting in the Middle East has pushed gas prices back above a nationwide average of $4 a gallon.

Warsh's approach is to prevent specific price increases from 'broadening out' to other parts of the economy. Traditionally, the Fed would hike rates if there were signs higher prices were spreading. However, some economists say inflation won't be defeated without action by the Fed.