“New Fed Communications”: Warsh said inflation risks have declined, but refused to disclose whether interest rates would be raised in July

Federal Reserve Chair Warsh, while attending the European Central Bank forum in Portugal, signaled improvements in the inflation outlook but remained deliberately silent on whether the July meeting would bring a rate hike, further complicating market expectations for the Fed's next move.

On Thursday, Nick Timiraos, the Wall Street Journal's "New Fed Whisperer," wrote that in Sintra, Portugal, Warsh noted that over the past four weeks, inflation expectations have declined and inflation risks have receded, viewing this as early evidence that the market has fully understood his hawkish stance. He explicitly warned that anyone expecting the Fed to tolerate inflation persistently above the 2% target "will be disappointed."

However, the "New Fed Whisperer" believes Warsh remained cryptic on tactical matters. When pressed on whether the Fed should raise rates at the July 28-29 meeting, he merely said he hoped for a "healthy family debate" among his colleagues, refusing to give a clear direction. This stance further heightened market uncertainty about the Fed's policy path.

Inflation risks recede, but the policy path remains unclear

The "New Fed Whisperer" believes Warsh attributed part of the recent improvement in inflation to the Iran ceasefire agreement driving down energy prices. He also noted that declining interest rate volatility, lower Treasury yields, and falling inflation expectations over the next year or two are early signs that his strategy is working.

Warsh refuted criticisms that his communication is opaque. He said, "I hear people say the market doesn't understand, but I think they actually understand it quite clearly." This statement suggests he intends to compress the Fed's forward-looking narrative on the economic outlook, reducing the market's overreliance on the policy path.

When asked whether the AI boom could fuel inflationary pressures, Warsh again avoided a direct response, only emphasizing that from a longer-term perspective, AI has the potential to expand the economy's productive capacity, thereby alleviating price pressures. "If businesses expand capacity, that would be very significant for the Fed," he said.

Internal divisions evident, rate hike debate heats up

The "New Fed Whisperer" believes there are clear differences within the Fed on policy direction. According to reports, of the 18 officials who submitted projections at last month's meeting, 9 saw a need for a rate hike by year-end, 8 favored keeping rates unchanged, and 1 expected a rate cut. Warsh himself, continuing his long-standing skepticism of economic projections, did not submit a forecast.

The Fed has kept its benchmark interest rate unchanged in the 3.5% to 3.75% range this year, after cutting rates by 25 basis points three times in a row at the end of 2025. The "New Fed Whisperer" argues that the economic landscape has shifted—the job market, after a brief slowdown early in the year, has regained strength, while the AI investment boom and a rising stock market have jointly supported spending by high-income groups, keeping the economy robust overall. This has raised concerns among some officials: even if headline inflation falls, strong economic growth could keep core price pressures persistently above the 2% target.

If the June nonfarm payrolls report released Thursday is strong, combined with potentially high inflation data later this month, it could further reinforce the hawkish stance of officials favoring a rate hike.

White House pressures, Warsh emphasizes independence

Meanwhile, the White House has publicly opposed a rate hike. Earlier that day, White House senior economic adviser Kevin Hassett told Fox Business that a Fed rate hike would be "a macroeconomic mistake" and expressed confidence that Warsh shares the view that AI-driven economic growth does not generate inflation and does not require a rate hike.

The "New Fed Whisperer" noted that Hassett also hinted that some Fed officials might be inclined to raise rates for political motives, specifically naming Jerome Powell, who remains a governor after his chair term ends, expressing concern that "a majority of the Fed" voting for a rate hike "may not necessarily be out of patriotism but rather wanting to go after Trump." However, Hassett excluded Warsh from this criticism, saying he faces the difficult task of "managing a group of unruly committee members."

In response, the "New Fed Whisperer" believes Warsh clearly reaffirmed the Fed's independence stance at the meeting, stating "there will be no change on this point." He also cited this week's Supreme Court ruling allowing Fed governor Lisa Cook to remain in her position, saying it further confirms the logic that the Fed defends its independence by fulfilling its duties. "If we achieve low and stable inflation, we won't have to worry about politics or judicial intervention," he said.

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