Kevin Warsh has been chairman of the Federal Reserve for mere weeks, and Wall Street is already pulling its hair out trying to figure out what he actually plans to do with interest rates.
The problem is simple: Warsh isn't telling. In his first public remarks, he dodged questions about rate policy entirely, saying only that the Fed would be meeting again in six weeks. That cryptic response has left analysts staring at a wide open field of possibilities, from multiple rate hikes as soon as late July to holding steady indefinitely.
This opacity isn't accidental. Warsh has long believed the Fed talks too much and acts too little. A surprise move now and then, he figures, is not the worst outcome. That philosophy may be fine in theory. In practice, it leaves markets and economists scrambling to divine his next move without any actual guidance.
The stakes matter because inflation remains stubbornly elevated. For five years running, price growth has sat above the Fed's 2% target. The Fed's preferred inflation measure rose 3.4% over the last 12 months, leaving legitimate questions about whether those gains will fade on their own or require a policy tightening to tame.
Some of the recent price pressure comes from temporary sources. Tariffs and shipping disruptions tied to the closure of the Strait of Hormuz have added to inflation. The real question is how much of the 3.4% increase reflects underlying, persistent inflation versus these one-off factors.
There's also a credibility issue. After a decade of undershooting its inflation target, the Fed faces pressure to prove it can actually keep prices near 2% long term. That could argue for rate hikes to reassert control. Or the committee could stick with former chair Jerome Powell's bet that inflation will naturally decline as temporary factors wear off.
Analysts at SGH Macro Advisers laid out two paths in recent research. One assumes the Fed will tolerate higher inflation on the assumption it fades naturally. The other shows a sharper policy turn with rate increases coming. They lean toward the second scenario but acknowledged that without forward guidance, parsing Warsh's true intentions amounts to educated guessing.
The Fed chairman will get two chances to clarify his thinking before July. He's scheduled to speak at the European Central Bank's conference in Sintra, Portugal later this week, and he'll testify before Congress in mid-July on monetary policy. Those moments could offer real clues about his reaction function, the technical term for how a central banker responds to economic data.
For the past dozen years, reading the Fed was straightforward. Listen to what the chairman says. Watch the dot plot showing officials' rate projections. Check the latest labor market and inflation numbers. Cross reference everything. Done.
Not anymore. Warsh has made the Fed watchdog business considerably harder, and that's entirely by design.
Author James Rodriguez: "A Fed chair who won't communicate is a feature to him, a bug to the markets trying to position accordingly."
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