At his first meeting as Federal Reserve chairman last month, Kevin Warsh presided over a unanimous decision to leave interest rates unchanged. Consensus was easy, with little appetite on the policymaking committee to move.
Holding that consensus together will be trickier in the weeks ahead.
Some of his colleagues’ inflation worries have sharpened since, and they could push to entertain a rate increase when the Fed meets July 28-29.
Warsh has an opportunity to steer that consensus when he testifies to Congress this week. He will do so with fresh June inflation data in hand, the last major data points before the meeting.
The roots of today’s tension go back to last year, when the Fed cut rates three times over worries about the labor market. A bloc of officials never thought the last two reductions were warranted, and some will now argue, in effect, for undoing them.
And the labor-market slump it worried about never came. That argues for a modest correction rather than a full-fledged hiking campaign: The Fed would take back insurance that is no longer needed, then stop and reassess.
“It’s simply reflecting welcome, positive news from the labor market and some issues with inflation that need to be taken into account,” said James Egelhof, chief U.S. economist at BNP Paribas, who expects the Fed to raise rates three times beginning no later than December.
That some officials who once pushed for cuts are now entertaining increases shows how the ground has shifted. Fed governor Christopher Waller worried the job market was faltering when he led the case for last year’s reductions. Last week, he declared the risks had “completely flipped” and, with them, his sense of where rates should go.
The case for patience says that if inflation is the product of a series of one-off shocks, it is precisely the kind of pressure a central bank is supposed to look through as long as households and businesses expect inflation to subside.
The pressure hardest to look through could be the artificial-intelligence build-out. There isn’t much the Fed can do about price shocks from tariffs and oil, but the hundreds of billions flowing into data centers are a continuing source of demand, which interest rates can restrain.
The prices of semiconductors and electrical gear, which usually inch along, look like “hockey sticks” on a chart, New York Fed President John Williams said last week. “If this creates a sustained impulse to demand relative to supply and inflation, I do think that’s the kind of situation where you don’t ‘look through,’” he said.
Williams has said interest rates are “well positioned,” suggesting little urgency to change them. But he tied that to inflation cooling over the second half of the year. In particular, he said he is looking for monthly core inflation readings of 0.2% or lower as tariff effects wane. That pace, annualized, runs near the Fed’s 2% goal. “I’m actually hoping that it might even be lower,” he said.
Anything faster would signal inflation is more persistent, and demand outstripping supply. “Monetary policy would need to respond to that,” he said. “If things play out in a more benign way, I do think that monetary policy would continue to be well-positioned.”
Williams is the rate-setting committee’s vice chair, traditionally part of the small circle of officials that helps the Fed chairman steer policy. That he is counseling patience suggests the hawks have yet to achieve a consensus for a July hike.
With Warsh having said little about his own preferences, the July decision has taken on extra weight: the first real signal of how he intends to run the central bank. He could side with those who want to hold steady, at the risk of a dissent or two from the hawks, and wait for more data to settle the question. Or he could propose a hike—either to reinforce the credibility of his commitment to price stability, or take ownership of an increase he sees as inevitable.
That first rationale—credibility—is one Williams dismissed last week. “The way you maintain the credibility that’s been built up over decades is by making the best decisions you can given the data we have rather than trying to use monetary policy to affect credibility,” he said.
Some who expect the Fed to eventually hike agree that Warsh doesn’t need to make a statement by moving now. After the June meeting, Egelhof read the chairman as inclined to be patient where possible: “If he has the luxury to wait, he will choose to.”
Write to Nick Timiraos at Nick.Timiraos@wsj.com