Kevin Warsh commits to tame the inflation beast

ANOTHER VIEW

The Federal Reserve held interest rates steady on Wednesday, and Fed Chair Kevin Warsh said the institution he leads is unanimously and unambiguously committed to bringing inflation under control. It’s going to be a long journey, but he has passed his first major test.

Inflation hit 4.2 percent in May, its highest level in three years. This increase leaves inflation at more than double the 2 percent rate that the Fed targets as part of its dual mandate to maintain stable prices and maximum employment. "We’ve missed for five years, and we’re going to fix that," Warsh said during a 42-minute news conference.

Rising prices prompted the European Central Bank to increase rates last week by 0.25 percentage points. And the Bank of Japan raised rates this week to levels not seen since 1995.

The U.S. hasn’t experienced an energy crunch as bad as Japan or Europe, but Warsh nodded to the pain Americans are feeling at the pump and in grocery stores. "Persistently high prices are a burden," he said, "but the recent past need not be prologue."

At his first meeting as chair, Warsh ended the practice of publishing forward guidance about what the board plans to do with rates at future meetings. But the Fed continued to release a summary, called the dot plot, of what officials who participate in the meetings expect will happen.

The latest version shows that nine members expect a rate increase by the end of the year, eight members anticipate no change and one expects a cut.

Warsh didn’t contribute his own estimate. His rationale is that markets ought to set prices based on how investors interpret real-time economic data, rather than what the Fed is likely to do. He joked that all the submissions were submitted in pencil and can be erased before the board meets again in six weeks.

The president’s tentative deal with Iran entails reopening the Strait of Hormuz, through which roughly 20 percent of the world’s oil flows. That should help ease the fuel crunch that has pushed average U.S. gas prices up by roughly a dollar per gallon compared with last year. But betting on peace and stability in the Middle East is a historically dangerous gamble.

At the same time, price changes tend to trail world events by months. Even though oil has fallen below $80 a barrel, there will be knock-on effects. Delayed fertilizer shipments, for example, are expected to keep prices elevated.

Warsh has the unenviable balancing act of demonstrating the central bank’s independence while trying to avoid the ire of President Donald Trump, who just nominated him to his four-year term as chair. Trump has made no secret of his desire for lower rates, though he’s recently said that Warsh should "do whatever he wants."

The chair declined to answer whether he’s spoken with Trump since starting the job. The real tests of his independence will come in the months ahead.

— The Washington Post