Warsh hasn't promised any particular action on rates, but he recently laid out a case that the Fed will need to raise interest rates if inflation doesn't moderate. He arguably preserved the wiggle room to keep rates flat if he and the rest of the Fed choose not to act at their Sept. 15-16 meeting. But with his leadership of the Fed under intense scrutiny from inside and outside the organization, not acting after his repeated inflation warnings will make it harder for him to convince the market he is serious next time.
Economists will find ways to slice the new CPI data. Warsh's challenge is that his economic philosophy specifically frowns on making quick turns on individual data points such as the latest CPI print. That puts him in contrast with Fed officials such as Governor Christopher Waller and New York Fed President John Williams. Both entered the final stretch before the meeting more inclined to wait for remaining data before deciding whether a rate increase was necessary.
Warsh, by contrast, has repeatedly warned against putting too much confidence in short-term forecasts. He said last month at the Kansas City Fed's annual symposium in Jackson Hole, Wyo., "accuracy in forecasting is still just an aspiration" for the Fed.
"Inflation is running above our 2 percent target," Warsh said in an Aug. 28 speech at Jackson Hole. "So the Fed's predominant focus right now should be on prices." Warsh said he was downplaying recent improvements in inflation data in favor of his broader view of underlying inflation, which he said was informed by his reading of the data feeding into the two main price indicators: personal consumption expenditures and the consumer price index.
"While this summer's PCE and CPI readings were better than expected, they do not tell me that underlying trends have meaningfully improved," Warsh said at Jackson Hole.
Headline inflation measured by the PCE index is up 3.7% as of the most recent data.
Waller, meanwhile, has given a reading of the data much more in keeping the Fed's tradition of data dependence. Inflation may be above 2%, Waller said at a Reuters event on Sept. 3. But "recent data suggests we are finally seeing some signs of disinflation," he continued. "Now, if this continues in the data over the next two weeks, I would be inclined to support holding the target for the federal funds rate at its current setting." He said he would be closely watching Friday's CPI data for clues.
Warsh, by contrast, has repeatedly warned against putting too much confidence in short-term forecasts. He said in Jackson Hole forecasting is "still just an aspiration" for the Fed.
The new data may sway Waller and others who would rather still wait and see. But if it doesn't, Warsh will face a choice. Does he wait for the Federal Open Market Committee to come around to his view? Or does he muscle Waller and other potential dissenters into accepting his view?
Waller has also made some more personal criticisms of Warsh, including calling his advice "weird." Maybe that's the payback Warsh has earned for insisting for years that the Fed where Waller and others served had lost its way — but bowing now to that point of view would effectively make Waller the center of the Fed's intellectual gravity instead of Warsh.
That could have tough implications for Warsh's task forces to assess the Fed's future, which Waller has dismissed behind closed doors, the Wall Street Journal reported.
If Warsh doesn't use his sway now, investors will start asking whether he really has any. And that will inevitably give way to a more uncomfortable series of questions about the Fed chairman's political loyalties.
President Donald Trump has pushed Warsh to cut rates, even while he insists he trusts Warsh to follow his conscience.
Some analysts have decided Warsh has made a tacit political arrangement with Trump not to raise rates ahead of the Nov. 3 midterm election. Warsh has been vocal in proclaiming his independence, and there is no evidence he has considered anything but his own reading of the economy in making rate decisions. But it's still hard for him to escape the shadow of the president who picked him as Fed chair.
A theory has emerged that, with his hands tied on interest rates, Warsh is content to simply let the market do his work for him. Market interest rates have risen across the yield curve since Warsh became Fed chair, including a sharp rise in the 10-year Treasury yield to 4.95% as of early Friday morning.
At his July press conference, Warsh made some ambiguous remarks that led some to believe he thought the market could do the work for him of tightening financial conditions. The Fed hasn't done much since he became chairman, Warsh said. "The markets have done quite a bit."
But it isn't clear what Warsh really meant. Another interpretation is that Warsh was saying the markets can now respond to the economy without having to second-guess what the Fed will do next. On that view, interest rates have risen because the economy has gained strength — a point the New York Fed's Wiliams has also made.
Warsh is now in the position to either vindicate his own views or reignite the debate about what is truly motivating him. If Warsh isn't seen as intellectually decisive, then investors, the public and the chairman's own colleagues may well look to someone else as the shadow chair. That could be Trump, Treasury Secretary Scott Bessent or Waller. Markets would would likely raise the yield on long-term debt to account for the uncertainty.
The Fed's September meeting will be crucial in determining whether Warsh is seen as the chairman he wants to be.
