JACKSON HOLE, Wyo.—Fed Chairman Kevin Warsh put to rest some concerns raised about his inflation-fighting strategy but set up a potentially bigger test three weeks from now. If the Fed raises interest rates, he risks infuriating the White House weeks before the midterm elections. If he holds, he could revive the doubts that Friday’s speech here quieted.
The central bankers gathered in the Tetons this weekend arrived unsure how much the Fed’s new chairman would tell them about how he reads the economy. Warsh had been criticized after last month’s meeting, including by several conference attendees, for not explaining how the Fed’s current stance would bring inflation down.
Kristin Forbes, a former Bank of England policymaker who moderated a panel at the conference, said investors should be careful reading the speech as a signal. Warsh has been explicit that he isn’t pre-committing, she said. “The door is open either way, and he’s been very clear that’s how people should be pricing it,” she said.
A chairman determined to show he isn’t offering guidance might have reason not to move next month, if only to stop investors parsing every speech for a signal, said Forbes.
On Friday, Warsh defended July’s decision with reasons to postpone a call—awaiting new information on supply chains, investment flows and geopolitics—rather than make the arguments some of his colleagues did to say why the current stance is appropriate. Absent soft August data, holding in September would put him back where July left him, explaining a decision without a satisfying rationale.
“If he doesn’t explain it well, he will lose credibility,” said Thomas Hoenig, a former president of the Kansas City Fed.
A rate increase next month would fall just weeks before the midterm elections in early November and would undercut the administration’s message that inflation has been brought under control. President Trump hasn’t put the same public pressure on Warsh that he applied to former Fed Chair Jerome Powell, whom he ridiculed for months to try to pressure into rate cuts. He is still trying to remove Fed governor Lisa Cook.
Trump has suggested in recent months that Warsh would prefer to leave rates alone and is being pushed by others on the committee, and the president’s top economic advisers have said inflation, excluding volatile energy prices, has improved.
Hoenig said it would be naive to think political pressure doesn’t register. “I don’t care who you are. It’s unavoidable,” he said. “We all put it aside, but it’s always there.” Warsh and his colleagues have said they don’t take politics into consideration.
Warsh leads a committee that is split. Three officials dissented from last month’s decision and at least two others without a vote said they also thought rates should rise. These officials are worried that inflation is likely to fester regardless of what the August data show, in part because tariffs, the conflict in the Middle East and the scale of AI investment will keep pressure on prices. They also see a risk that elevated inflation and strong growth will sustain higher price growth.
Others aren’t opposed to raising rates eventually but see a mistake in moving if monthly price readings continue to break in a more favorable direction, as they did in June and July.
A third group sits somewhere in between. A few who supported July’s decision could now lean in favor of hiking, leading to more dissents than the three last month if the Fed holds steady in September.
Chicago Fed President Austan Goolsbee is among those who see the question as unsettled. What matters to him is what kind of inflation this is: a run of supply shocks, which are historically short-lived and don’t have an obvious policy response, or demand running ahead of what the economy can supply. If overheating from the artificial-intelligence boom spreads to the broader economy, he said, “that’s just a regular old central bank needing to respond to the business cycle. There’s no ambiguity of what has to happen.”
The complication is that the shocks keep arriving. Goolsbee said the tariffs weren’t one and done: New rounds piled onto earlier ones, courts undid some, and still more have followed.
Former central bankers at the conference said the speech was important because it showed Warsh could take criticism and adjust. He reaffirmed the Fed’s 2% target after fuzzing it up last month and didn’t repeat an argument he had made last year while under consideration for the job, that AI would drive prices down and let the Fed cut faster. “The AI fairy didn’t show up,” said Kohn.
Warsh’s description of how he reads the economy and what does and doesn’t concern him mattered most, said Kohn. “It builds a foundation for more communication like that in the future.”
Write to Nick Timiraos at Nick.Timiraos@wsj.com