Federal Reserve Chairman Kevin Warsh, speaking in Sintra, Portugal, reiterated the central bank's firm commitment to its 2% inflation target, vowing to "disappoint" any expectations of a looser monetary policy. This stance comes despite President Donald Trump's repeated calls for interest rate cuts. Warsh emphasized the Fed's independence, stating, "We have been an independent central bank for a long time. We are going to be an independent central bank at this moment and you will see no changes on that." His comments suggest a shift from previous views, as he had reportedly advocated for lower rates before becoming Fed chief in May.
Warsh's remarks led traders to slightly trim their rate-hike bets, though a 70% probability remained for a September 15-16 rate increase. Economists like Oren Klachkin of Nationwide noted that the "balance of risks has clearly shifted," indicating that earlier investor assumptions of rapid rate cuts under Warsh are unlikely to materialize. Klachkin expects rates to hold steady through the year.
Consistent with his opposition to "forward guidance," Warsh declined to offer specifics on future policy moves or economic forecasts. He indicated that decisions on rate hikes would be made during the Fed's closed-door meetings, such as the upcoming two-day session on July 28. This comes shortly after a Supreme Court ruling affirming the Fed's independence by blocking Trump from firing Governor Lisa Cook.
Inflation has been a significant concern, with the May inflation rate hitting a three-year high of 4.2% due to factors like the Iran war's impact on gas prices. However, Warsh noted signs that persistent inflation threats have moderated, citing declining inflation expectations in surveys and bond prices. Despite these moderating signals, Warsh maintained a hawkish tone regarding the Fed's primary focus on achieving price stability.
