Fed Faces Volatility Test as Warsh Pushes Rate Hike
Kevin Warsh argues for rate hike despite market expectations, citing inflation risks and credibility.
2 min read
Kevin Warsh, the Federal Reserve’s vice chairman, is pushing for a rate hike despite Wall Street’s expectation of inaction, arguing that volatility might be exactly what the Fed needs to restore market confidence and combat rising inflation.
Warsh’s Credibility at Stake
Warsh has long advocated for a shift in focus from Fed officials’ words to the underlying economic data. However, his actions so far have not matched his rhetoric. With inflation still above the Fed’s target and showing signs of broadening, the case for a rate hike is strong. Oil and gasoline prices remain high, and no resolution to the Iran conflict is in sight, leaving headline inflation likely to stay elevated.
Market Certainty vs. Economic Reality
Despite these economic pressures, investors are largely betting against a rate hike, with the CME’s FedWatch tool placing the probability of a quarter-point increase at around 10 to 15 percent. The Fed’s dual mandate, however, appears to be holding up well, with low unemployment and a booming economy as evidenced by strong job market data and record stock prices.
Timing and Political Considerations
Warsh may also have political motivations for raising rates. A hike would demonstrate his independence from President Trump and reinforce his leadership at the Fed. While some argue that the Fed might avoid a hike near the midterm elections, historical precedents show that this is not always the case. A second rate hike is seen as less provocative than starting a cycle just before an election, and there is little political backlash expected, given the potential for lower long-term rates and support from conservative pundits.
Volatility as a Necessary Tool
Some Fed officials warn that a rate hike could create undue volatility, but critics argue that the current lack of volatility is itself a problem. Prolonged periods of market tranquility have led to complacency, with investors and businesses taking on more risk. This ‘volatility paradox’ could lead to dangerous financial instability if not addressed.
Warsh’s Call for Action
Warsh’s push for a hike is also a statement about his commitment to abandoning forward guidance. By acting decisively, he aims to correct the misconception that the Fed is indecisive. While the market is not expecting a hike, Warsh believes that demonstrating his resolve is essential for maintaining the Fed’s credibility in the face of ongoing inflationary pressures.
Source: Breitbart
