(Edited quotation in paragraph 2 and added reference to ‘in the household or business sector, financial markets’)
Francesco Canepa and Howard Schneider
SINTRA, Portugal, July 1 (Reuters) – Federal Reserve Governor Kevin Warsh said on Wednesday that the U.S. central bank will remain firmly committed to its 2% inflation target and will “disappoint” anyone expecting loose monetary policy despite President Donald Trump’s call for a rate cut.
“If there were people in the financial markets, whether in households or in the business sector, who thought that this central bank would be happy with an inflation target of above 2% – I think they would be disappointed,” Warsh told a European Central Bank panel in Sintra, Portugal, stressing that he would give little indication – beyond restating the inflation target – of where he thinks monetary policy or the economy is heading.
When asked whether the potential for disappointment had spread to Trump, who chose Warsh as Fed chairman and said he expected borrowing costs to fall, Warsh said, “We have been an independent central bank for a long time. We will be an independent central bank right now, and you will not see any change in that regard.”
Warsh spoke just two days after the U.S. Supreme Court ruled that Trump could not fire Fed Governor Lisa Cook, confirming the central bank’s stance even as the justices expanded the president’s power to remove members of other ostensibly independent bodies — a ruling Warsh said he had read but did not think would change the way the Fed conducts its business.
Warsh’s second public appearance in Portugal since taking over as Fed chair in May saw him turn with other senior central bankers into a shared rejection of “forward guidance” and a reluctance to even say much about the economy.
Warsh said U.S. central bankers will decide whether to raise interest rates, for example, when they “close the door” and begin their next two-day meeting on July 28, and told the panel’s moderator that he would “fail” to violate the rule of not commenting on interest rate decisions or even the risks and factors that frame the discussion.
Traders slightly reduced their bets for a rate hike following Warsh’s speech, but they still see a 70% chance that the Fed will raise borrowing costs at its September 15-16 meeting.
Oren Klachkin, Nationwide financial market economist, wrote after Warsh’s speech: “It looks increasingly likely that investors’ early assumptions, led by Warsh, that the Fed would cut rates quickly will not come true.” “The balance of risks has clearly shifted,” Klachkin added, although he expected the Fed to keep interest rates steady throughout the year.
Speaking at the ECB’s annual policy forum in the Portuguese hillside town, Warsh said: “We will go into that room and close the door, we will have a good discussion, but I have nothing more for you than that.”
“I’m not going to give forward guidance,” Warsh continued, answering a follow-up question from CNBC host Sara Eisen: “Sara is trying to convince me to break this rule. She’s going to fail.”
He later extended his rule to the economic outlook, which often forms the basis of Fed comments and is distinct from discussion of interest rate outcomes.
“Are we playing Mad Libs now?” When asked about Eisen’s view on upcoming economic growth, Warsh referred to a popular pun and said:
“You’re back to advanced guidance. I’m going to discourage you from trying to pull that off. … My view is that financial markets and the real economy work best when you look at what’s going on in the real economy. You make your own decisions.”
Asked if he thought AI could at least lead to inflation for now (another key issue the Fed is analyzing), he said it was up to the central bank to make sure it doesn’t happen rather than solve some aspects of inflation in general. artificial intelligence Even if it ultimately increases productivity, it can strain existing resources.
BACK TO FIRST PRINCIPLES
Warsh shared the stage in Portugal with ECB President Christine Lagarde, Bank of England Governor Andrew Bailey and Bank of Canada Governor Tiff Macklem, who are dealing with high inflation and the effects of the US-Israeli war with Iran.
However, the impact of this conflict took them in different directions. Warsh’s comments after the June 16-17 policy meeting caused investors to increase the likelihood that the Fed would raise interest rates as soon as September, while the ECB had already increased borrowing costs. Central bankers in Britain and Canada are more reluctant to tighten monetary policy due to domestic economic weakness.
Other central bankers on the panel shared Warsh’s view that it is unwise to say too much about interest rates; This reality, Warsh suggests, could herald a new global reliance on “first principles” in central banking and lead to an eventual elimination of the problems he attributes to Fed policies established in the wake of the 2007-2009 global financial crisis. Warsh was a Fed governor in those years before leaving office in opposition to some of the programs that were put in place and campaigned against them over the next 15 years.
“I feel incredible relief that I’m not sure I’ve internalized that my colleagues in the central banking community around the world are willing to go back to first principles,” Warsh said. “We are all, in some sense, burdened with many of the policies that the Fed established in the 2008 financial crisis, which provided huge balance sheets and a lot of information to drive financial markets.”
Those specific policies and other issues will be examined by a series of working groups. Warsh said Wednesday that names would be named next week and hinted that former foreign central bankers might be named to some panels — in the spirit of reviews Warsh and others have done of institutions like the BOE, where he expects quick results.
Specifically, he said it was his “desire” that the Fed would begin using real-time data to set monetary policy within a year and rely less on retrospective government surveys.
Because of artificial intelligence and what he described as the “exponential” rate of change, Warsh said it’s important to notice new trends as they emerge rather than after they occur.
Potential changes to come in the job market are particularly noteworthy, he said.
“We’re in the first or second phase of this revolution. Jobs will be bigger, prosperity will be greater… the issue is timing,” Warsh said. “We have a dual mandate and we have to deliver on both the employment side and 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)
