Warsh addresses the microphone he’s hesitant to embrace.
Kevin Warsh convened his inaugural Federal Open Market Committee meeting as Fed chairman on Tuesday. Tomorrow, he will face the press for the first time. Arguably, what’s most intriguing is what he chooses not to say.
Mr. Warsh has long argued that the Fed communicates too much. His advice to investors last year was simple: “Think more, say less.” He feels central banks are mired in excessive forward guidance, dot plots, and various officials offering their opinions on every issue. He’s advocating for the Fed to take a step back, perhaps even to a less prominent spot.
On Wednesday, he’s expected for the fee meeting. No major changes are anticipated, as inflation continues to climb, driven by the Iranian energy crisis. Current fund rates sit between 3.5% and 3.75%, and discussions are leaning toward rate hikes instead of cuts later this year. According to CME’s FedWatch tool, which assesses the likelihood of Fed actions based on federal funds futures contracts, it leans towards one rate hike by year-end, while two hikes appear unlikely and there’s about a 40% chance of no hike at all.
This statement will likely omit the phrase “Reducing prejudice.” Words signaling his next move seem to have vanished. Warsh is taking over a committee that halted rate cuts, and during the last meeting, three members expressed a desire to eliminate this language. It seems his views may have garnered some support. Nevertheless, he personally prefers to avoid such language in public statements. Therefore, it would be a mistake to label his stance as strictly hawkish. It seems that both the hawks and those advocating for reduced guidance have arrived at common ground.
Dot plots and economic outlook
Hence, attention turns to the economic forecast overview. All 19 officials have indicated their projections for interest rates. Bank of America anticipates that the median prediction for 2026 will reflect no rate cut this year and has adopted a hawkish stance since March, with several officials hinting at a potential rate hike. Inflation forecasts are expected to rise markedly, while growth projections will likely be lowered. The dot plot is poised to send a strong hawkish signal.
Except for one possibility. Warsh may not provide any dots. As it is his first meeting, rejecting the prediction is a discreet way to criticize a process he deems “terrible” without having to outright dismiss it. “My dots won’t be perfect either,” he remarked last year, “so I won’t offer a dot.” He also justifies this stance by noting that it may not be wise to base predictions on less than a month’s experience at the Fed.
Of course, lacking evidence for Warsh’s predictions probably doesn’t equate to a lack of predictions altogether. This means FRB watchers will be on the lookout for Warsh’s invisible points. Without markings on the chart, Wall Street analysts will attempt to deduce the chairman’s position based on his remarks. The critical query is whether the hypothetical Warsh dot will be lower than, equal to, or potentially higher than the current federal funds rate.
Reporters will likely remain skeptical about Mr. Warsh not having a stance on future interest rate trends. However, Mr. Warsh’s longstanding belief is that the chairman should avoid such opinions. He isn’t concealing invisible points; he simply doesn’t have any dots to plot. But such a lack of clarity will likely be unsatisfactory for journalists and analysts alike.
Another challenge in interpreting the economic forecasts from this conference is that a conflict with Iran could render them outdated. The very moment they are released, gasoline prices have driven official inflation figures over the past three months. However, this month, they might exert the opposite effect, likely pulling down the overall price index.
Performing some quick calculations, gasoline averaged around $4.48 per gallon in May, which increased the headline CPI by roughly a quarter of a point. Currently, a gallon of gasoline is priced around $4.05, and Brent prices have dipped to about $78 due to the reopening of the Strait of Hormuz. This shift may reverse the inflationary trend, with fluctuations capable of impacting monthly headline figures significantly. If the rest of the basket holds steady as in May, the CPI for June, due in July, could be flat or even negative as gas prices decline toward $3.90. Should gas prices continue to drop, July’s report may see a distinctly negative headline.
This presents a dilemma for the hawks, who have built their case by avoiding attention to previous oil spikes. Adhering to intellectual consistency means not selectively reviewing data mid-way through. Surprised committee members unprepared for these projections may find themselves facing reports they hadn’t anticipated.
This sudden change in inflation might actually bolster Mr. Warsh’s argument against forward guidance. In an environment where inflation could shift dramatically—from being extremely high in May to possibly negative in July—it’s wiser to stay flexible rather than create a false sense of security for the market.
