Kevin Warsh faced his first test as chair of the Federal Reserve on Wednesday – and chose caution over confrontation with Donald Trump. The central bank held US interest rates steady at between 3.5% and 3.75%, a decision that defied the president’s calls for cuts but also avoided the rate hike that a hawkish minority had wanted.
Fed governors were split on whether to keep rates unchanged or raise them to combat inflation, which has been pushed up to 3.8% by the US-Israel war in Iran. Yet after a debate that mirrored the divisions running through the US economy, the rate-setting committee voted unanimously to stand pat. A statement backed by all 12 members of the Federal Open Market Committee said: “Economic activity is expanding at a solid pace despite elevated uncertainty that owes, in part, to the conflict in the Middle East. Productivity growth and capital investment are strong. Job gains have kept pace with the workforce, and the unemployment rate has changed little.”
“Fed holds rates as Warsh pledges price stability, with majority of officials predicting a hike this year.”
Warsh, who was nominated by Trump to replace Jerome Powell after the president grew frustrated with his predecessor’s refusal to slash rates, has long argued that the Fed should say less and do more. Wednesday’s statement reflected that philosophy: it ran just 132 words, down from almost 350 in April. “The Committee will deliver price stability,” it concluded bluntly. The update also removed a previous hint that the Fed might cut rates in the future, replacing any dovish leaning with a vow to control prices.
The shift in tone was reinforced by the closely watched “dot-plot” grid of central bankers’ rate expectations, released alongside the decision. Nine of the 18 participants in the FOMC’s rate-setting process predicted an interest rate hike this year, while only one said they expected a cut. The remaining eight forecast rates would stay the same. Warsh did not offer a projection of his own – he opposes the dot-plot – but said he encouraged his colleagues to go ahead with it.
Samuel Tombs, chief US economist at Pantheon Macroeconomics, called the dot-plot’s hawkish tilt the “big news” from the meeting. The prospect of higher borrowing costs before the end of the year has rattled markets and put Warsh on a potential collision course with the president who appointed him.
Asked about the Fed’s decision, Trump shrugged: “It’s alright… whatever.” When told that rates could rise, he replied: “It could happen… it’s hard to believe… it just keeps the country down, it is so unusual.” But he was quick to praise Warsh. “We have a very good guy over there now, so I’m guided by what he wanted,” the president said.
In a press conference after the decision, Warsh sought to project calm, steering a middle course between the White House’s demands for cheaper money and the inflation hawks on his own committee. Whether he can keep that balance – and whether the dot-plot’s prediction of a hike becomes reality – remains the central question for the world’s most powerful central bank.