Fed Chair Kevin Warsh explains why interest rates are left unchanged
A divided Federal Reserve left its key interest rate unchanged on July 29, despite President Donald Trump’s calls for a cut.
After five years of inflation above the Fed’s 2% target, Federal Reserve Chair Kevin Warsh said he understands businesses and households’ “impatience,” but that he has no “magic wand” to bring it down.
Warsh remained adamant that the Fed will deliver on price stability, despite not changing the benchmark interest rate it typically raises to tame inflation at its July meeting.
While the federal funds rate remains at a range of 3.5% to 3.75%, Warsh suggested markets were doing some of the Fed’s inflation-fighting work for it. He pointed to higher nominal and real yields across the Treasury curve since the Federal Open Market Committee last left its benchmark rate unchanged in June.
“Prices reacted in real time to incoming information,” Warsh said. “Market participants are learning to play the ball, not the referee, and market prices will continue to respond in the direction and magnitude they see fit.”
He said this represented a change for the better, adding, “After all, the central bank need not always and everywhere be the center of attention.”
Besides, what the Fed does might not matter much for consumers in the short term anyway, amid rising energy prices and uncertainty in the Middle East, some experts told USA TODAY.
Warsh’s messaging: ‘confusing’ or ‘perfect sense’?
Warsh’s news conference following the decision was “one of the most confusing” in recent memory, Principal Asset Management’s Chief Global Strategist Seema Shah said.
No fan of letting markets or viewers know what he’s thinking, Warsh has repeatedly said he wants markets to respond to economic data, not what they think the Fed will do. Shah said while that makes some sense, in practice it’s impossible to separate the fact markets are also predicting where rates are headed.
“If you are credible enough and people genuinely believe in your 2% target, you will never actually have to raise policy rates because inflation expectations will always stay very anchored,” Shah said. “But once the economy turns away from you, and there are existing price pressures, such as rising energy prices, factors coming from the AI build-up, it’s no longer enough for you to just convey this insistence that price stability is important.”
Isaac Wheeler, Derivative Path’s managing director of balance sheet strategy, said Warsh is making “perfect sense” as both he and former Fed Chair Jerome Powell recognized the market can tighten or loosen monetary policy conditions before the Fed even acts.
“What’s very different is that where Powell felt like now, he was on the hook to deliver what the market priced in and letting himself, some might say, get pushed around by the market, Warsh doesn’t seem to have that same view,” Wheeler said. “He’s saying, ‘Well, the market’s tightened for me. Maybe we have to do nothing.’”
Can markets lower inflation?
After the July meeting, long-term U.S. government bond yields rose to their highest levels since 2007, suggesting investors may think Warsh’s current approach may not be enough to control inflation. The 30-year Treasury yield, which in part reflects inflation expectations, jumped to 5.21%.
“A sharp steepening of the yield curve and a meaningful repricing of September hike odds represent a market openly questioning Warsh’s message, credibility and reaction function,” Christian Hoffmann, head of fixed income at Thornburg Investment Management, said.
While interest rates cannot change prices at the gas pump or the grocery store, higher borrowing costs set by the market can slow spending and eventually lead to lower inflation. It’s yet to be determined if that is the “optimal path,” Hoffmann said.
“Having a credible central bank, anchoring inflation expectations, and a reaction function to those expectations has proven to be a pretty good functional system,” he said. “We’re trying something new and experimenting. There’s a lot of risk around that.”
Some at the Fed may not be convinced
Warsh said he wanted another “family fight” at the July meeting, and he got one.
The Fed’s decision to leave its benchmark interest rate unchanged wasn’t unanimous. Three central bank presidents dissented, preferring to raise the target range by a quarter-point.
After the meeting, markets are predicting the Fed’s next move in September will be a hike. Most traders are betting on a quarter-point increase, though some predict there will again be no change, according to CME FedWatch.
“There is a risk we will need more aggressive rate hikes to reduce inflation, which is due to both demand and supply factors,” KPMG Chief Economist Diane Swonk said in a note after the July decision. “Shocks that persist can become systemic.”
Wheeler said he wouldn’t be surprised if the Fed remains on hold for the rest of the year, adding Warsh may want to hear from the five task forces he created to advise the committee on monetary policy before making a move.
What does this mean for consumers?
Even without a Fed rate hike, borrowing could still get more expensive.
For example, the 30-year fixed-rate for mortgages tends to track the trajectory of the 10-year U.S. Treasury note, not the Fed’s benchmark rate. After the July meeting, it stood at about 6.66%, up from 6.47% in mid-June.
“Oil and inflation remain the biggest drivers, and mortgage rates will likely need energy prices to settle and inflation to remain under control before they can move meaningfully lower,” Jeff DerGurahian, loanDepot’s chief investment officer and head economist, said in a note to USA TODAY.
While other interest rates, like those on credit cards, do react more to changes in the federal funds rate, Hoffmann said more overall uncertainty could push them higher, too.
“It means more volatility and that probably means a higher cost of borrowing to you,” Hoffmann said. “If this is successful in (lowering) inflation in the long term – what appears to be an evolving and slightly different approach – is to be determined.”
Reach Rachel Barber at rbarber@usatoday.com, follow her on X @rachelbarber_, and subscribe to her newsletter “Making More of Your Money” here.