Fed Chair Warsh holds rates at 3.6% as inflation stays above 3%

Kevin Warsh has made clear the Federal Reserve's priority: crushing inflation, even if it means keeping rates higher for longer.

Warsh, sworn in May 22, has declared "no tolerance" for inflation running above the Fed's 2% target. The fed funds rate stands at 3.6%, with CME FedWatch data pricing a 90% probability it will be higher by year-end.

"The members of our Committee have no tolerance for persistently elevated inflation, and we share a resolute commitment to restoring price stability," Warsh said during his first semiannual congressional testimony as chair.

Inflation accelerated to 4% in May before easing to 3.5% in June, still well above the central bank's 2% goal. Core inflation, which strips out food and energy, slowed to 2.6% last month. The Fed has held rates unchanged since cutting from a peak of 5.25%-5.50% in 2023, and Warsh declined to participate in the Summary of Economic Projections at the June meeting — a break from the forward guidance approach of his predecessor.

The stakes are high for investors. Higher-for-longer rates threaten the debt-laden AI data center build-out, housing affordability, and auto loans. The S&P 500 has climbed 10% this year despite the hawkish posture, but a rate increase would test that resilience. The next FOMC meeting is scheduled for September, where markets see a 56% chance of a hike as of July 22.

Warsh has launched five internal task forces to examine Fed policy, including one focused on how the central bank measures inflation. He has previously advocated for a "trimmed averages" method that strips out the most volatile price changes — a methodology that would have pegged the Fed's preferred PCE gauge at 2.3% in February, a half-point below the headline reading. Still, he told reporters the 2% target remains "a good barometer."

The Iran war has added a complicating factor. Higher oil prices, driven by reduced tanker traffic through the Strait of Hormuz, have pushed up gasoline costs and fed into broader price measures. Rate hikes are less effective at addressing supply-driven shocks, and some economists argue the Fed should wait to see if energy prices moderate on their own before acting.

The last time a Fed chair used similarly hawkish language in a debut congressional appearance was in 2022, when Jerome Powell signaled the central bank would pursue jumbo rate hikes. The S&P 500 fell 18% over the following six months as the Fed delivered 75-basis-point increases at four consecutive meetings.

For now, Warsh is keeping his cards close. By opting out of the SEP, he has made it harder for markets to predict the Fed's next move. Kalshi, the prediction market, shows a 64% probability that the Fed hikes rates before 2027.

This article is for informational purposes only and does not constitute investment advice.