Hot CPI puts Warsh’s credibility on the line before rate call: Analysis

Warsh hasn’t promised any particular action on rates, but he recently laid out a case that the Fed will need to raise interest rates if inflation doesn’t moderate. He arguably preserved the wiggle room to keep rates flat if he and the rest of the Fed choose not to act at their Sept. 15-16 meeting. But with his leadership of the Fed under intense scrutiny from inside and outside the organization, not acting after his repeated inflation warnings will make it harder for him to convince the market he is serious next time.

Economists will find ways to slice the new CPI data. Warsh’s challenge is that his economic philosophy specifically frowns on making quick turns on individual data points such as the latest CPI print. That puts him in contrast with Fed officials such as Governor Christopher Waller and New York Fed President John Williams. Both entered the final stretch before the meeting more inclined to wait for remaining data before deciding whether a rate increase was necessary.

Warsh, by contrast, has repeatedly warned against putting too much confidence in short-term forecasts. He said last month at the Kansas City Fed’s annual symposium in Jackson Hole, Wyo., “accuracy in forecasting is still just an aspiration” for the Fed.

“Inflation is running above our 2 percent target,” Warsh said in an Aug. 28 speech at Jackson Hole. “So the Fed’s predominant focus right now should be on prices.” Warsh said he was downplaying recent improvements in inflation data in favor of his broader view of underlying inflation, which he said was informed by his reading of the data feeding into the two main price indicators: personal consumption expenditures and the consumer price index. 

“While this summer’s PCE and CPI readings were better than expected, they do not tell me that underlying trends have meaningfully improved,” Warsh said at Jackson Hole.

Headline inflation measured by the PCE index is up 3.7% as of the most recent data.

Waller, meanwhile, has given a reading of the data much more in keeping the Fed’s tradition of data dependence. Inflation may be above 2%, Waller said at a Reuters event on Sept. 3. But “recent data suggests we are finally seeing some signs of disinflation,” he continued. “Now, if this continues in the data over the next two weeks, I would be inclined to support holding the target for the federal funds rate at its current setting.” He said he would be closely watching Friday’s CPI data for clues.

Warsh, by contrast, has repeatedly warned against putting too much confidence in short-term forecasts. He said in Jackson Hole forecasting is “still just an aspiration” for the Fed.

The new data may sway Waller and others who would rather still wait and see. But if it doesn’t, Warsh will face a choice. Does he wait for the Federal Open Market Committee to come around to his view? Or does he muscle Waller and other potential dissenters into accepting his view? 

Waller has also made some more personal criticisms of Warsh, including calling his…