Warsh’s Communications Policy Faces Its First Big Test

Key Takeaways

• Hot inflation data released last week appeared to cement the case for an interest rate hike when the Fed meets this week.
• When it comes to the rate decision and future moves, investors will be paying close attention to how Fed Chair Kevin Warsh communicates.
• Warsh has rejected “forward guidance” and avoided discussions of Fed deliberations in his press conferences.

With the Federal Reserve widely expected to raise interest rates Wednesday, investors and economists are already looking forward to what the central bank will do next. But with new Fed Chair Kevin Warsh taking a stance against telegraphing future moves, a key question is what—if any—information investors will have to guide them.

In that sense, this meeting will be an important test for Warsh. Over the summer, he rattled markets with an explicit rejection of what Fed-watchers call “forward guidance”—the practice of communicating the Fed’s thinking and the likely path of interest rates to the public. Warsh has said he prefers a more tight-lipped stance when it comes to the Fed’s thinking, but in August, he laid out more explicitly his view that inflation, which has been running above the Fed’s 2% target for more than five years, is too high and that the Fed’s focus should be on prices.

However, the inflation outlook is particularly unclear. On the one hand, many economists and some Fed officials believe that inflation is a slow downtrend despite a stubbornly high reading on the Consumer Price Index for August. At the same time, the expanding conflict in the Middle East is driving up energy costs and the artificial intelligence boom is raising costs elsewhere in the economy.

Against this backdrop, Warsh’s mixed signals have been tough for investors to digest. “Warsh has given the market a reasonably limited amount of information around how he is setting up his framework to interpret data,” says Simon Dangoor, head of fixed income macro strategies at Goldman Sachs Asset Management.

So, how will he approach September’s meeting? “That’s the million dollar question,” Dangoor says. “Are we going to get that less committal Warsh, as we saw in July, or a more expansive Warsh in terms of what he’s prepared to tell the market?”

An Interest Rate Hike Looks Imminent

Data released last week showed that price pressures remain elevated, with the Consumer Price Index report rising 3.4% on an annual basis in the month of August. The core measure of inflation, which excludes volatile food and energy prices, rose 2.4% on an annual basis. While the Fed uses a different measure of price pressures—the Personal Consumption Expenditures Index—to track inflation, the CPI numbers were enough to indicate that the PCE report, due to be released later this month, will be elevated, too.

“The markets reacted pretty quickly and pretty aggressively” to Friday’s data, says Thiago Ferreira, senior economist at Vanguard. Bond futures markets now see 88% odds that the central bank raises rates this week, compared with 60% odds last week and 33% odds a month ago. “It does put pressure on the Fed to hike.”

That would bring the federal-funds rate target to a range between 3.75% and 4.00%.

Warsh’s New Approach

But even with so much evidence to support a hike, Wednesday’s meeting will bring plenty of new material for investors to chew on.

Derek Tang, cofounder of monetary policy research firm LH Meyer, says that Warsh’s rejection of forward guidance has extended to a reluctance to share his thought process about how he’s interpreting today’s economic data, too—a stance that can be “unsettling” to the market.

Vanguard’s Ferreira believes that while muddy inflation data means the question of forward guidance is a “moot point,” Warsh is facing pressure to communicate his thought process at the Fed’s Wednesday press conference. “He is going to have to answer questions,” Ferreira says, or face more backlash from markets.

“The September meeting will be another opportunity for [Warsh] to explain how he sees things,” Tang adds. “We heard … a very hawkish message designed to establish his inflation credibility [in August], and now I think the public is seeing if he will follow through his words with action.”

A Tricky Inflation Picture

In that closely watched speech last month, Warsh emphasized that inflation is not only too high, but it has also been too high for more than five years. Inflation as measured by the PCE Index is currently 3.3%, far higher than its trough of 2.3% last April.

“Progress [on inflation] has essentially stagnated in the past year,” says Vanguard’s Ferreira.

Complicating the picture for the Fed, however, are the drivers of that stubborn inflation. War, tariffs, immigration, and the knock-on effects of the artificial intelligence buildout are putting upward pressure on prices, but monetary policy is not always an effective tool to mitigate that pressure.

“The Fed controls the federal-funds rate,” says Tang of LH Meyer. “It doesn’t control the world.” That doesn’t preclude the Fed from raising rates, he adds. “It still needs to show that it’s willing to do something.”

More Hikes Ahead? Not Necessarily

Even if the Fed hikes this week, analysts aren’t confident that move will signal the beginning of a new cycle for the Fed—especially given the idiosyncrasies in the August report and the uncertainties surrounding Warsh’s approach.

“It is quite possible that this meeting is a one-and-done—the lone hike of the cycle,” writes Christopher Hodge, chief US economist at Natixis. He expects future inflation data to be softer.

Volatile oil prices stemming from the war in Iran are also complicating the picture, adds Dangoor of Goldman Sachs. “When we come to the decision in October, when we come to the decision in December, there are many different scenarios for energy [prices],” he says. “They could be much higher, or they could be much lower.”

For his part, Ferreira of Vanguard expects Warsh and the Fed to frame a hike on Wednesday as a “recalibration,” especially given the variability in the past few months of inflation data. “They will go one meeting at a time,” he says.