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At Kevin Warsh’s first meeting as Fed chairman, we are seeing signs of how much the inflation picture is impacting the debate over interest rates. And the central bank is showing early signs of an independent streak.
Federal Reserve officials hinted more strongly at the possibility their next move will be to raise interest rates. That comes after President Trump chose Warsh as someone he counts on as being committed to lower rates. Instead, Warsh’s debut revealed a committee moving toward hikes.
The WSJ Leadership Institute checked in with Aaron Kuriloff, the markets bureau chief of The Wall Street Journal, for his take. “Anyone hoping that a FOMC chaired by Kevin Warsh would be newly dovish got those hopes dashed today,” Aaron told us. “Instead, Fed officials remained on hold and signaled more strongly that their next move could be to raise rates, not lower them.”
During his press conference, Warsh reiterated that the central bank needs to deliver on its 2% inflation target, which investors took as a further sign rates could rise. Stocks and bonds both retreated.
The following is a condensed, edited version of our conversation.
Aaron, what struck you most about Warsh's first Fed meeting?
Warsh did change things today. The Fed’s statement was very short—about one-third as long as usual. Warsh said he expects to offer less forward guidance in the future, making Fed-watching harder. Relatedly, he also didn’t offer an economic projection on the chart known as the “dot plot,” a practice he has said he doesn’t like. And he kicked off some new task forces, on issues like the central bank’s data-gathering and balance-sheet management.
What do you expect to see in his first 100 days?
Wall Street expected a more divided Fed, with more disagreement between members of the FOMC about the path of interest rates. And indeed, while the Fed was unified on today’s decision, it was pretty evenly divided on the future, with about half the committee expecting rates to rise this year. But this is an unusual time, with the fallout from the Iran war’s energy shock still working its way through the economy. Though the U.S. and Iran have signed an agreement to end hostilities, investors and Fed officials will also be watching closely to see if it holds up and how quickly shipping lanes reopen to ease prices.
Going ahead, what are some key things company leaders and investors should be monitoring as Warsh begins his tenure?
The energy shock remains a key variable for the path of rates. Many investors expect inflation pressures to ease in coming months as the Strait of Hormuz reopens and global supply chains normalize, so first and foremost, they’re watching the flow of oil from the Middle East. The economy has also run hotter than many expected, with the labor market strengthening instead of weakening, giving the Fed more room to focus on inflation. So people are watching the data there, too.
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