Written by Francesco Canepa and Howard Schneider
SINTRA, Portugal, July 1 (Reuters) – Federal Reserve Chairman Kevin Warsh said on Wednesday he would stick to the U.S. central bank’s target of 2% inflation and “disappoint” anyone who expects monetary policy to loosen despite President Donald Trump’s call for interest rate cuts.
“If people thought the central bank was going to relax with an inflation target above 2%, they would be disappointed,” Warsh told a European Central Bank panel in Sintra, Portugal, stressing that – beyond reiterating the inflation target – he would give little indication of where he thinks monetary policy or the economy is headed.
Asked if the disappointment may have spilled over to Trump, who picked Warsh to take over as Fed chief and has said he expects borrowing costs to come down, Warsh said, “we’ve been a big private bank for a long time. We’re going to be a big private bank this time and you’re not going to see any changes to that.”
Warsh spoke just two days after the US Supreme Court ruled that Trump cannot fire Fed Governor Lisa Cook, affirming the central bank’s stance as the justices expand the president’s power to remove members of other independent agencies – a ruling Warsh said he has read but doesn’t think will change the way the Fed conducts its business.
A public appearance in Portugal, Warsh’s second since taking over as Fed chief in May, saw him join other central bankers in what became a general rejection of “forward direction” and an apparent reluctance to even say much about the economy.
Warsh said that US banks will decide whether to raise rates, for example, when they “close the door” and start their next two-day meeting on July 28, and told the president of the panel that he would “fail” to violate his rule against commenting on rate decisions or even risks and factors that establish a debate.
Traders slightly reduced their rate hike bets as Warsh spoke, but still placed a 70% chance of the Fed’s borrowing costs rising at its September 15-16 meeting.
“It’s increasingly looking like investors’ early assumption that a Warsh-led Fed would cut rates quickly will not hold,” Oren Klachkin, chief financial market economist at Nationwide, wrote after Warsh’s appearance. “The balance of risks has clearly shifted,” Klachkin said, though he expects the Fed will eventually hold rates steady for the rest of the year.
Speaking at the ECB’s annual policy meeting in the Portuguese hill town, Warsh said, “We go into that room and close the door, we’re going to have a good debate, but I don’t have much more for you than that.”
“I’m not going to give advance guidance,” Warsh continued, responding to a follow-up question from CNBC anchor Sara Eisen saying, “Sara is trying to get me to break this rule. She’s going to fail.”
He later expanded his dominance to economic theory, which is often the basis of Fed commentary and is unique to discussing rate results.
“Are we playing Mad Libs now?” Warsh said that when Eisen asked about his opinion on the coming economic growth, he mentioned a famous pun.
“You’re back to directing. I’m going to torture you trying to pull that out. … My view is that the financial markets and the real economy work better when you look at what’s happening in the real economy. You make your own decisions.”
Asked if he thought artificial intelligence could currently be inflationary — another issue the Fed is analyzing — he replied generally that it was up to the central bank to make sure it wasn’t, rather than addressing how some aspects of AI might squeeze available resources or ultimately boost productivity.
BACK TO THE FIRST ROUNDS
Warsh shared the stage in Portugal with ECB President Christine Lagarde, Bank of England Governor Andrew Bailey, and Bank of Canada Governor Tiff Macklem, all of whom are dealing with inflation and the fallout from the US-Israel war with Iran.
But the impact of that conflict took them in different directions. Warsh’s comments after the June 16-17 policy meeting prompted investors to raise odds that the Fed will raise rates as soon as September, while the ECB has already raised borrowing costs. The central banks of England and Canada have been reluctant to tighten monetary policy given the weakness of local economies.
Other central bankers on the panel also shared Warsh’s view that talking too much about rates was unwise, a fact Warsh suggested could usher in new global confidence in central bankers’ “principles,” and a final dismissal of the problems he says stemmed from the Fed’s policies created after the 2007-2009 global financial crisis. Warsh was the governor of the Fed during those years before leaving the job in opposition to some of the proposed plans, and campaigned against them for the next 15 years.
“I feel incredibly comforted that I’m not sure I’ve internalized that there is a willingness among our colleagues in the global banking community to return to the original goals,” Warsh said. “We are all burdened with many of the policies, in one way or another, that the Fed created in the 2008 financial crisis,” including large balance sheets and providing too much information to guide financial markets.
Those specific policies and other issues will be reviewed by a series of staff that Warsh said Wednesday will be named next week, indicating that former foreign bankers may be named to other panels – in the spirit of the review made by Warsh and others at institutions such as the BOE – and where he expects immediate results.
In particular, he said it was his “wish” that within a year the Fed would switch to using real-time data to make monetary policy and rely less on retrospective government research.
Because of AI and what he described as the “tremendous pace” of change, Warsh said it’s important to recognize new trends as they happen, not after the fact.
Potential changes in the job market are very important, he said.
“We’re in the first or second phase of this revolution. … Jobs are going to be big, prosperity is going to be big … the question is about timing,” Warsh said. “We have a double responsibility and we have to act on the employment side and on the stable price side.”
(Reporting by Howard Schneider; Additional reporting by Francesco Canepa and Balazs Koranyi in Sintra; Editing by Dan Burns, Andrea Ricci and Paul Simao)
