Warsh Walks Tightrope on Interest Rates

Kevin Warsh, chairman of the Federal Reserve, faces a precarious situation as he prepares to make a decision on interest rates at the central bank's next meeting on September 15-16. Financial markets now see a quarter-point increase as more likely than not, leaving Warsh with a tough choice whether to follow through with action.

A month of benign inflation data would alleviate some pressure on him to raise rates in September, but the market backlash to his last meeting in July showed that he will need to explain how doing nothing aligns with his intolerance for elevated inflation. A rate increase next month would help underpin the seriousness around Warsh's inflation pledge, but it would also create an immediate showdown with the Trump administration.

Warsh has made clear that with the labour market stable, the Fed's focus is chiefly on tackling inflation. Raising rates by three-quarters of a percentage point would ensure some downward pressure on economic activity, helping to snuff out price pressures. However, this decision comes at a time when the administration has gone to great lengths to pressure the Fed into lowering rates.

Experts, including Maurice Obstfeld, a senior fellow at the Peterson Institute for International Economics and former chief economist at the International Monetary Fund, warn that Warsh is in a 'no-win situation'. As Austan D Goolsbee, president of the Chicago Fed, notes, the right decision comes down to whether the data shows the most recent bout of inflation was persistent or just a one-time increase. Susan C Collins, president of the Boston Fed, also acknowledges that the inflation data is 'mixed', suggesting that higher rates are not a foregone conclusion but remain a real possibility if there is not a discernible improvement soon.