Fed's Warsh Faces Inflation Test as Core CPI Looms

Core CPI lands Wednesday with economists expecting 0.2%. That number could decide the Federal Reserve’s next move on interest rates. “Inflation data this month could decide the Fed’s rate hike next month.” An unnamed source in the story put it that way.

The Fed left rates on hold last month. Three policymakers dissented and wanted a hike. Now all eyes turn to Chairman Kevin Warsh. His lack of detailed guidance on easing price pressures has led some investors to question his inflation-fighting credibility.

I have watched this script before. A central bank chair arrives with a reputation for toughness on prices. Then the communications go quiet. Markets start guessing. Confidence slips. It happened in the early 1980s when Paul Volcker took over and kept his cards close until the pain showed results. It also happened in 2018 when Jerome Powell walked back earlier hawkish signals and the market punished him for the pivot.

Warsh’s situation feels different in one key way. He has not pivoted. He has not given much to pivot from. Since taking the helm in May, he has talked tough about inflation but resisted discussing specifics or promising action. He has made a point of not providing his own economic forecasts or explaining how he reads the latest data. That silence sits badly with colleagues and investors alike.

The numbers behind the worry are plain. Inflation has run above the Fed’s 2% target for 65 consecutive months. That streak stretches from the pandemic surge in 2021 through a near-return to target in 2024 and into a fresh price wave after President Donald Trump’s second term began. Annual inflation stood at about 3.4% in July. Core PCE, the Fed’s preferred gauge, rose 0.2% on the month and 3.3% on the year.

A higher reading than the expected 0.2% would threaten the Fed’s 2% inflation target. It would also lift the odds of a rate hike at the September 15-16 meeting. Fed funds futures reflected about a 40% probability of a hike after the latest report, up from roughly 36% before. Markets see the best chance for a move coming in December if September does not deliver.

Warsh’s credibility problem isn’t just about the next meeting. It is about the long game. A survey of academic economists found that about 60% say the Fed now needs more time to bring inflation down to its 2% target than it did when Warsh took office. More than 60% also said concerns over the Fed’s credibility had a very large or considerable impact on the rise in long-term interest rates since Warsh’s nomination in January.

Christiane Baumeister, a professor at the University of Notre Dame, said in recent commentary that Warsh’s reluctance to offer a clear, public assessment of the current state and outlook of the U.S. economy is fueling anxiety. She warned this can breed unnecessary speculation and undermine stability. Eric Rosengren, a former Boston Fed president, said Warsh may refrain from discussing future policy decisions but should explain the decisions he is making now.

I keep returning to the word credibility. It is a central bank’s main weapon when rates alone cannot do all the work. If people believe the Fed will do what it says, they adjust wages and prices in ways that make the job easier. If they doubt it, the Fed must move harder and longer. That is the lesson from the 1970s stop-go cycles that let inflation expectations drift higher.

Warsh’s first major speech as chairman arrives this week at the Jackson Hole symposium. It is a high-profile slot to rebut his critics. Analysts say he will have to soothe investors frazzled by his cryptic communication style or risk having his leadership undercut by other policymakers filling the void. Economists do not expect him to touch on the debate over whether to hike next month in his Friday speech. They want him to more strongly commit to the 2% inflation target and to clearly explain how the Fed plans to respond if inflation continues to run above target.

There is another layer to this story. Politics are adding to the Fed’s credibility problems. Diane Swonk, chief economist at KPMG, wrote that in a recent commentary. Concerns that President Trump’s influence could undermine the central bank’s independence have hovered over the Fed for more than a year. Since Trump’s pick Kevin Warsh became chair three months ago, that cloud has only darkened.

The human problem here is simple. Borrowing costs, mortgage rates, and business investment plans all hinge on what the Fed does next. A rate hike would cool demand and slow price growth. It would also raise the cost of credit for households and companies already stretched by higher rates. A hold would keep financing cheaper but risk letting inflation expectations drift.

Only one more employment report and a read on August inflation data will be released before the Fed’s meeting next month. That leaves little room for error. If Core CPI comes in above 0.2%, pressure on Warsh to act will mount. If it matches or undershoots, he may buy time but not trust.

I do not know what Warsh will say at Jackson Hole. I do know what the pattern says could come next. If he offers a clear commitment to the 2% target and a plain explanation of how the Fed will get there, markets may steady. If he stays cryptic, other Fed officials may speak more loudly and pull policy in their direction. The next few weeks will show whether the Fed can repair its credibility or whether it must spend more of it to get the job done.