Warsh Ups Stakes for Next Fed Meeting  08/31 06:05

   Federal Reserve Chair Kevin Warsh renewed his inflation-fighting credentials 
in a speech Frida y that opened the door to potential rate hikes in the coming 
months.

   WASHINGTON (AP) -- Federal Reserve Chair Kevin Warsh renewed his 
inflation-fighting credentials in a speech Frida y that opened the door to 
potential rate hikes in the coming months.

   In doing so, Warsh has put more pressure on the central bank to increase 
interest rates when it next meets in mid-September if inflation doesn't 
improve. The government's next price report, to be released just days before 
the meeting, could play an outsize role in determining whether the central bank 
acts.

   Warsh's high-profile speech at the Fed's annual Jackson Hole economic 
conference was mostly praised afterward by economists and other Fed 
policymakers in attendance. Still, there was also some pushback and criticism 
during the first day of the conference. It ends Saturday.

   Here are some takeaways from the conference so far:

   Hawkish comments raise pressure for September rate hike

   While Warsh opened the door to raising borrowing costs, he did not commit to 
any particular timing. It's not surprising given his aversion to sending 
signals about the Fed's next moves the way his predecessors did, which Warsh 
felt boxed the Fed in to a preset path.

   Some analysts, however, saw strong hints that a rate increase in September 
is a real possibility. Warsh noted that he and other Fed officials who 
supported keeping rates unchanged at their July 28-29 meeting "thought the 
wiser course was to await new information in the intermeeting period ... before 
deciding whether a change in interest rate policy was advisable."

   That suggests that Warsh wanted to see clear evidence of cooling inflation 
after the July meeting to remain on hold. Yet elsewhere in his remarks he said 
that such evidence hasn't emerged -- even as gas prices have come down 
somewhat, underlying inflation hasn't "meaningfully improved."

   By sending such signals, Warsh has raised expectations for a hike next 
month. If inflation remains high and he doesn't follow through, his credibility 
could take a hit.

   "You are basically setting yourself up so that if you don't hike in 
September, people may ask what's going on," said Adam Posen, president of the 
Peterson Institute for International Economics.

   A September rate hike would be politically awkward

   The Fed is scheduled to meet twice before the upcoming midterm elections, in 
September and late October. Any decision to lift interest rates at those 
meetings could spark a response from President Donald Trump, who has often 
accused the Fed of having political motivations. He claimed the Fed's 
half-point rate cut in September 2024, for example, was intended to help 
Democrats in that year's election.

   Posen said that if the Fed ultimately skips a rate hike in September, it 
would raise questions about whether it did so to avoid attacks from Trump.

   "You never raise rates to spite elected officials," Posen said. But doing so 
would also demonstrate the Fed's independence, which depends on the ability to 
"raise rates when it's justified, over the president's loud objections."

   Austan Goolsbee, president of the Federal Reserve Bank of Chicago, said "I 
don't think about" the elections.

   In an interview on the sidelines of the conference, he added that Fed 
officials focus on "what is the state of the economy, and what do we need to do 
to stabilize prices and maximize employment?"

   A Fed rate hike may -- or may not -- lift mortgage rates

   When the Fed raises its benchmark interest rate, it often can boost interest 
rates for mortgages, auto loans, credit cards and business borrowing.

   Yet in this case it isn't as clear. Longer-term interest rates -- including 
those on the 10-year Treasury note, which strongly influence mortgage rates -- 
barely rose after Warsh's comments. Analysts said that suggested that investors 
were reassured that the Fed would bring down inflation over time. Otherwise, 
they would have pushed longer rates higher.

   In short, longer-term rates don't always follow the Fed's lead, so even if 
there is a rate hike in September, it may not push up consumer borrowing costs. 
As it is, the average rate for a fixed 30-year mortgage is 6.66%, according to 
Freddie Mac, slightly higher than a year ago.

   All-in on AI

   Much of Warsh's speech actually focused on the potential for artificial 
intelligence to strongly boost the economy. He has spoken previously about the 
possibility that AI could increase the economy's efficiency, which would enable 
it to expand without creating inflationary pressures. That would, in turn, 
reduce pressure on the Fed to lift rates.

   "We've come to a hinge point in history," Warsh said. "The potential for 
substantially higher growth is on the rise."

   But in a luncheon speech Friday, Kenneth Rogoff, a Harvard economist and 
former chief economist at the International Monetary Fund, expressed a much 
more cautious take on AI's potential. He wasn't responding to Warsh's comments 
specifically.

   "I think the idea that AI magically solves everything is a bit overblown," 
he said, adding that if it does sharply boost growth, that would likely lead to 
higher interest rates, which typically rise in a healthy economy.

   Fed independence worries remain but have cooled since last year

   A year ago, then-Fed Chair Jerome Powell received a standing ovation from 
the roughly 120 or so attendees before he even delivered his speech. It was a 
clear sign of support as Trump ramped up its attacks on Powell and the Fed for 
not cutting rates as much as he wanted.

   Trump tried to fire Fed governor Lisa Cook on the first day of last year's 
conference, in an effort to gain a majority on the Fed's board. Cook sued to 
keep her job and the Supreme Court ruled in June she could do so while the case 
played out in court.

   Cook attended this year's conference, just days after her lawyers argued the 
administration has no legal basis for removing her.

   Rogoff, in his remarks, expressed concern about Fed independence but didn't 
get into details.

   Warsh suggests inflation is broad and stubborn

   Since taking office in late May, Warsh has largely avoided commenting on 
where inflation might be headed or what is keeping it elevated. On Friday, he 
provided his most extensive comments yet about an inflation surge that has 
soured most Americans on the economy and kept price increases above the Fed's 
2% target.

   He noted that inflation has been broad and not just a result of higher gas 
prices stemming from the Iran war. More than half the goods and services the 
government tracks have seen their prices rise 3% or more from a year ago, he 
said. That's "well above" the roughly one-third that saw such increases in the 
two decades before the pandemic.

   Warsh also argued that inflation wouldn't necessarily fall back to 2% on its 
own, a comment that suggests he doesn't consider inflation to be a result of 
just one-time shocks, such as tariffs, that will fade over time.

   That is a view shared by the three Fed officials who voted in favor of rate 
hikes at the central bank's last meeting in July.