Assuming Kevin Warsh succeeds Jerome Powell as Federal Reserve chair by mid-May as planned, one of his first acts may be to preside over an interest rate hike, a true baptism of fire which would raise the ire of his boss, President Donald Trump.
With the Middle East conflict triggering a massive global energy shock, oil soaring above $100 a barrel, and pre-conflict U.S. inflation figures already flashing red, it’s not an outlandish scenario. Fed officials are discussing it, and financial markets are now pricing it.
The Fed left policy unchanged on Wednesday as expected, keeping the fed funds target range at 3.50-3.75%. Officials also maintained their projections for one quarter-point rate cut this year and one next year.
However, the wind is blowing in the opposite direction, although the idea that the Fed’s next move could be a rate hike pre-dates the recent energy shock. Policymakers have been discussing it all year.
OPTIONS FLIP
Minutes of the Fed’s January meeting show that “several participants” indicated they would back a “two-sided” description of the Fed’s future decisions, acknowledging the possibility that the next move might be to raise rates.
Powell downplayed the possibility at the time, telling reporters in his January press conference: “We don’t take things off the table, but it isn’t anybody’s base case right now — anybody’s base case — that the next move will be a rate hike.”
He was a little less forthright on Wednesday, telling reporters that tightening was discussed again, adding: “The vast majority of participants don’t see that as their base case, but of course, we don’t take things off the table.”
Not only was it discussed, the revised ‘dot plot’ summary of officials’ rate projections showed that one policymaker penciled in a rate hike for next year. If inflationary pressures persist, that official won’t be a lone voice for long.
The revised dot plot shows seven of the Fed’s 19 rate-setters expect rates to remain unchanged this year, seven envisage one quarter-point cut, and five feel two will be needed.
Traders doubt there will be any more easing at all. Derivatives market pricing shows the probability of a rate cut this year is close to zero and, according to JPMorgan analysts, December 2026 ‘SOFR’ futures options imply a roughly 20% chance of a hike by year end.
TIME IS NOT ON HIS SIDE
This would be difficult terrain for Warsh. It would be anathema to Trump, a long-standing advocate of low interest rates who has lambasted “clueless” Powell for being “too late” in cutting. Trump even said on Monday that the Fed should have a “special meeting” to cut rates immediately. This was one day before the scheduled two-day policy meeting began.
Trump expects Warsh to push for lower rates.
“If he came in and said ‘I wanna raise them’… he would not have gotten the job,” Trump told NBC last month.
Powell on Wednesday indicated that further easing is conditional on goods and non-housing services inflation coming down, and on the one-off price hits from tariffs and now, the energy shock, fading quickly.
February’s producer price inflation released earlier on Wednesday suggests that is wishful thinking. The annual core rate jumped to 3.9%, which Morgan Stanley economists say raises 3-month annualized core PCE inflation – the Fed’s preferred measure – to 4.56%. That’s more than double the Fed’s 2% target. And remember, these are pre-oil shock numbers.
Inflation has been above the Fed’s target for five years, and all the signs are it will increase in the short term. Powell is also rightly worried that the oil shock could hamper consumer spending and create negative wealth effects, causing longer-term damage to employment and growth.
Powell has only one more scheduled policy meeting as Fed Chair. He can probably afford to wait and see how these dynamics play out. Warsh won’t have that luxury.
(The opinions expressed here are those of Jamie McGeever, a columnist for Reuters)
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(By Jamie McGeever; Editing by Marguerita Choy)