Fed interest rate decision today: Why Kevin Warsh's silence has made the Federal Reserve meeting highly uncertain

Fed interest rate decision is uncertain as Kevin Warsh keeps markets guessing. Here's why the Federal Reserve may hold or raise rates amid easing inflation.

The US Federal Reserve is widely expected to keep interest rates unchanged when it announces its policy decision on Wednesday. However, this meeting is more uncertain than usual because Fed Chair Kevin Warsh has stopped giving clear guidance about what the central bank may do next.

Fed interest rate decision is uncertain as Kevin Warsh keeps markets guessing. (REUTERS/Eric Lee/File Photo) (REUTERS)

Since Warsh became Fed chair in May, he has followed a policy of giving very little explanation and no forward guidance before interest rate decisions. Because of this approach, investors, economists and financial markets do not know what to expect, making this one of the most closely watched Fed meetings in recent months.

The Fed's policy-setting committee has 19 members, and at the June 16-17 meeting, they were evenly split on whether interest rates should be increased later this year. This means Kevin Warsh's decision could determine the final outcome, as he has the power to influence the committee in the direction he wants.

Another uncertainty is whether Warsh will explain his decision during his press conference, or continue his policy of giving very little guidance about future interest rate moves, as noted by Reuters.

Warsh has repeatedly said he has "no tolerance" for inflation staying above the Fed's 2% target, which it has done for more than five years. Until last month, inflation had been rising because of the US-led war with Iran, which pushed up fuel and food prices, while heavy spending on artificial intelligence and data centres also increased demand across the economy, according to Reuters. Despite these inflation concerns, all Fed officials agreed during the June meeting to keep the benchmark interest rate between 3.50% and 3.75%.

Inflation has started cooling

Since the last Fed meeting, inflation has shown signs of easing, reducing pressure on the central bank to immediately raise rates. US consumer price inflation slowed to 3.5% in June, compared with 4.2% in May. At the same time, oil prices have fallen sharply this week, helped by renewed hopes of another US-Iran ceasefire, which could further reduce inflation pressures.

Why many expect no rate hike

Many economists believe the Fed will wait instead of raising interest rates immediately, especially after June's better inflation data. Krishna Guha, vice chairman of Evercore ISI, said the Fed can always raise rates at its September meeting if inflation becomes a concern again. Guha said, "We think the Fed will probably not hike. It would be odd to do so right after the better June inflation print, given an uncomplicated path to hike in September if needed", as quoted by Reuters.

However, Guha also warned that Warsh's silence makes the outcome difficult to predict. He said, "But we cannot take the probability too low given Warsh's refusal to set out his strategy. ... We do not see broad pressure on the committee to hike now. But the votes are there if Warsh wants to go", as noted by Reuters.

Some Fed officials support higher rates

Ahead of this week's meeting, Dallas Fed President Lorie Logan and Cleveland Fed President Beth Hammack both suggested that higher interest rates may still be needed to bring inflation back to the Fed's 2% goal, as stated by Reuters. Economists believe at least one of them could formally disagree (dissent) if the Fed decides to keep interest rates unchanged.

Financial markets currently see about a one-in-three chance that the Fed will raise interest rates by 0.25 percentage points this week. While most economists expect no change, some analysts believe Warsh could surprise markets with a rate hike.

While there is debate over whether the Fed should raise rates or leave them unchanged, almost nobody expects an interest rate cut at this meeting. The Fed's latest economic projections show that only one policymaker expects interest rates to be lower by the end of this year.

Trump's pressure on the Fed

A rate hike would likely disappoint President Donald Trump, who has repeatedly demanded lower interest rates to support the economy. Trump chose Kevin Warsh as Fed chair hoping he would support easier monetary policy, but that has not happened so far.

Trump has instead blamed other Fed board members for preventing Warsh from cutting interest rates. Trump said, "We should have the lowest interest rate in the world. Kevin is fantastic, but he's got a board, and the board members are very political", as noted by Reuters.

During his June 17 press conference, Warsh said financial markets are one of the most important sources of information for central bankers. He said he does not want to tell markets in advance what the Fed plans to do because he wants investors to respond to economic data, not to the Fed's own comments.

The biggest question before Wednesday's announcement is whether the Fed will keep rates unchanged, as most expect, or whether Kevin Warsh will surprise markets with a rate hike.