Warsh's Hawkish Talk May Hide Dovish Tendencies

Kevin Warsh, the new chair of the Federal Reserve's Board of Governors and Federal Open Market Committee (FOMC), has been making tough talk about inflation and interest rates. However, his recent comments at a post-FOMC press conference may suggest that he is holding back on taking more aggressive action.

Warsh has repeatedly stated that prices are too high and that the Fed will achieve price stability and bring inflation down to 2%. The market initially responded by pricing in multiple rate hikes for this year and next. However, at the FOMC's recent July meeting, the committee held rates steady, and Warsh made some interesting comments.

Warsh assigned a task force to look into how the Fed measures inflation, which is currently done using the Personal Consumption Expenditures (PCE) Index. He also hinted that he may be considering alternative methods, such as trimmed averages, which could make inflation appear more manageable than it does under the current framework.

Comments like these have led the market to view Warsh in a more dovish light. The likelihood of the Fed raising rates by a quarter point in September has decreased from over 82% before the FOMC meeting to just 61%, and there is now no chance that rates will be up by half a point.