The July meeting may become a key point for the outside world to judge Warsh's policy style.

Source: Jin Shi Data

Kevin Warsh chaired the meeting for the first time as Federal Reserve Chair last month, and the Federal Open Market Committee (FOMC) unanimously decided to maintain interest rates unchanged. Reaching a consensus at that time was not difficult, as there was almost no willingness among committee members to adjust rates.

Nick Timiraos, the chief economic reporter for The Wall Street Journal and known as the "Fed's megaphone," wrote that maintaining this consistency in the coming weeks would be more challenging. Since then, some officials have noticeably heightened their concerns about inflation, and the voices pushing for interest rate hikes may grow stronger during the July 28 to 29 Federal Reserve meeting. Warsh testified before Congress this week, having received the last batch of key data before the July meeting—the June inflation report.

The debate can be traced back to last year. The Federal Reserve lowered interest rates three times due to concerns about the labor market, but some officials always believed that the last two rate cuts were unnecessary. Now, some are actually advocating for the reversal of these rate cuts. The economic environment has changed, especially the labor market, which appears more stable than when concerns were at their peak last year; an increasing number of officials worry that this resilience will keep inflation above the 2% target.

The surge in oil prices triggered by the Iran war briefly shifted the Fed's focus from the economy to inflation. Although oil prices have significantly retreated from wartime highs, this has not brought much comfort. Officials supporting rate hikes are no longer just focusing on energy prices; tariffs on imported goods, energy and fertilizer supply disruptions caused by the war, and the AI boom are all seen as factors pushing prices up.

The Federal Reserve does not often face inflation driven by special factors that are quite sticky. The models it traditionally relies on often assume that inflation is a broadly disseminated phenomenon, with the labor market as a core variable. Minneapolis Fed President Neel Kashkari said last month in a panel discussion, "Most of the analytical tools we use to assess inflation begin with the labor market. However, the labor market is not the cause of inflation. This is an exceptionally challenging moment for us."

The monetary policy report released by the Federal Reserve last Friday stated that wage growth is roughly consistent with a 2% inflation rate. This is the first time in a semiannual report since inflation surged five years ago that such a judgment has been made. If wages are not an issue, inflation is more likely to come from areas that are difficult to predict in the Fed's traditional models.

The June Consumer Price Index (CPI) report will be released on Tuesday, which may directly influence this debate. If core inflation, excluding food and energy, remains robust this summer, hawks will have more reason to argue for addressing price pressures; if the data weakens, the rationale for waiting will strengthen.

Officials supporting interest rate hikes share a common premise: after last year's rate cuts, monetary policy may still be looser than the Federal Reserve originally anticipated, while the economy no longer actually requires these supports. When rates were cut last year, the Fed expected inflation to only slightly exceed the 2% target, but actual inflation has remained between 3% and 4%. The result is that the current target interest rate of 3.5% to 3.75% is effectively close to zero or even negative, stimulating the economy more than initially envisioned.

Meanwhile, the sluggish labor market that the Federal Reserve was worried about has not materialized. This has made some officials inclined to make a moderate adjustment rather than initiate a full rate hike: first retract unnecessary insurance measures, then pause and observe. James Egelhof, chief U.S. economist at BNP Paribas, said this reflects positive changes in the labor market, as well as inflation issues that need to be considered; he expects the Federal Reserve will raise rates at least three times before December.

Some officials who previously supported rate cuts are now also considering rate hikes, and this shift itself indicates that the situation has changed. Fed Governor Christopher Waller, who was concerned about labor market weakness during last year's rate cuts, stated last week that the risks have "completely reversed," and his view on the interest rate path has also changed.

Those advocating patience believe that if inflation arises from a series of one-off shocks, the Federal Reserve should "see through" these pressures, as long as households and businesses expect inflation to subside, the central bank need not react immediately. The most challenging aspect to "see through" may be the infrastructure build-up in artificial intelligence. For price shocks caused by tariffs and oil prices, the Federal Reserve has limited means; however, the tens of billions flowing into data centers represent sustained demand, and interest rates can directly suppress this type of demand.

New York Fed President John Williams stated last week that semiconductor and power equipment prices typically rise slowly, but on a chart, they look like a "hockey stick." If sustained demand continues to drive supply and inflation imbalances, he believes this is a situation that cannot be "seen through." Williams said that interest rates are "at a reasonable position," indicating that there is no particular urgency for adjustments in the short term, but this depends on whether inflation continues to cool in the second half of the year.

Williams specifically mentioned that if the tariff effects weaken, he hopes to see monthly core inflation readings at 0.2% or lower, annualizing close to the 2% target; he said he "actually hopes it might be even lower." If the growth rate is faster, it indicates that inflation is more persistent and demand exceeds supply, requiring a response from monetary policy; if the trend is more moderate, monetary policy will remain in a reasonable position.

As the vice chair of the interest rate-setting committee, Williams was originally part of the core circle assisting the Federal Reserve Chair in policy-making. He still advocates patience, indicating that there is not yet consensus among hawks regarding a rate hike in July. Warsh himself rarely expresses opinions publicly, which makes the July decision especially important, as it will become the first real signal for the outside world to observe how he leads the Federal Reserve.

Timiraos wrote that Warsh may choose to align himself with those hoping to stay on hold, even if it leads to one or two dissenting votes, and wait for more data to calm the controversy. Another option is to directly push for a rate hike, either to strengthen his credibility regarding the commitment to price stability or because he believes that a rate hike has become inevitable. Williams has already denied the rationale of "maintaining credibility through action," stating that maintaining the reputation built over decades relies on making the best possible decisions based on existing data, rather than trying to shape credibility through monetary policy.

Some who believe the Federal Reserve will eventually raise interest rates also acknowledge that Warsh does not necessarily need to act immediately to clarify his position. Egelhof of BNP Paribas judged after the June meeting that this chair is more inclined to wait when there is room to do so; in his words, "If he has the room to wait, he will choose to wait."