Kevin Warsh opened his first Federal Reserve meeting as chairman on Tuesday with inflation at 4.2% for May, more than double the Fed’s 2% target. President Donald Trump wants rates lower anyway.
Trump nominated Warsh after more than a year of harsh criticism of the previous chairman, Jerome Powell, and chose him for his view that policy needs more easing. Trump says he supports an independent Fed. He has also said the price of money should sit below its current level, between 3.75% and 3.5%, to stimulate investment and growth.
Oil is feeding prices
The two-day meeting of the Federal Open Market Committee comes with fuel costs from the war against Iran seeping into other goods and services. The US and Iran say they will sign a memorandum of understanding on Friday to end the war. Experts warn that normal hydrocarbon supply through the Strait of Hormuz will take time to return and show up in prices, so the upward trend is likely to last.
Brent crude has fallen three dollars since the agreement was announced on Sunday, to around $77. That is still 20% above where it stood before the war began on February 28.
Economists split
Philipe Waechter, chief economist at Ostrum, wants the Fed to raise rates. “Sustained price increases generate uncertainty and erode confidence in institutions,” he said, adding that the central bank should not risk staying inactive if the shock looks persistent. He wants it to “act quickly and decisively.” In his view, “a gradualist approach, based on small steps, is not the most effective.”
Eric Winograd, chief US economist at AllianceBernstein, expects a wait-and-see stance. “Unless oil prices fall sharply, and soon, we expect headline inflation to continue rising,” he said. He does not expect weaker household spending to cause a recession, but warned that the consumer, at around 70% of US activity, is the biggest driver of the economy. “If the consumer weakens, the economy as a whole will weaken too.”
The jobs data gives Warsh little cover for a cut. Last month’s report showed 149,000 new jobs and 66,000 fewer unemployed people, a market that is cooling but not enough to bet on stimulus. Many analysts say a bigger slowdown is needed to justify lowering the benchmark rate, and the latest Bureau of Labor Statistics reports have already pushed expectations for the first cut of the Warsh era further out.
