When Federal Reserve Chairman Kevin Warsh takes the stage in Bangkok on Friday morning, it will be after 11 p.m. on Thursday in New York. But investors, economists and politicians in the United States will stay awake and hang on his every word.
Any speech by a Fed president is closely scrutinized. This week’s debate takes on an added dose of urgency, however, after two government reports showed inflation was rising for consumers and businesses, sparking speculation about when the Fed would raise interest rates to deal with soaring prices.
Warsh will speak at the annual meeting of the International Monetary Fund and the World Bank, where he will be interviewed by IMF Managing Director Kristalina Georgieva. The Fed chairman has repeatedly said he won’t use his public remarks to intentionally steer investor and market expectations, but his comments could nonetheless indicate whether the central bank will raise rates before or after the Nov. 3 midterm elections.
It will also be the last speech by a Fed official before policymakers enter a “blackout” period on Saturday that will last until their next interest rate meeting, scheduled for Oct. 27-28.
“Widespread” inflation “strengthens the case for an October hike,” Bank of America analysts wrote Wednesday. “The data continues to highlight two key sources of inflationary pressure: AI and Iran. »
These two factors are also unlikely to disappear anytime soon.
The price of politics
Already hit by rising interest rates, rising energy prices and stagnant wage growth, U.S. consumers could face an additional dose of financial stress if the Fed raises rates again this month.
Voters are already unhappy with President Donald Trump’s handling of the economy, polls show, so another rate hike could add to Republicans’ headaches as they face losing their congressional majority in the midterms.
In recent weeks, Trump has attempted to pull several policy levers to lower gasoline and diesel prices, which have driven up inflation in recent months. But none of them have slowed prices significantly yet.
“On day one, we will end inflation and make America affordable again,” Trump said on the campaign trail in 2024. Inflation, measured by the Consumer Price Index, fell to 2.3% four months into Trump’s term.
But that same month, Trump unleashed a wave of tariffs across the world, radically changing the economic situation.
In September, inflation once again exceeded the 3% threshold. In February, Trump launched war against Iran, triggering one of the worst energy shocks in history. Inflation jumped to 4.1% in May and appears to be moving back in that direction.
Another Fed rate hike would also further damage Trump’s years-long pressure campaign to push the central bank to cut rates. Since Warsh took office in May, the central bank has either kept rates steady or increased them.
Trump did not attack Warsh after years of hammering former President Jerome Powell. But the president began saying that other members of the Fed board were “very hostile.”
“I’m counting on Kevin,” Trump told reporters in September, “but he has, you know, a very tough board. He has a board that was put in place by a lot of other people, and the interest rates are too high.”
“They’re very political,” Trump said. Four of the Fed’s seven board members were appointed by Trump.
When asked about the president’s expectations for Warsh’s appearance, the White House pointed to a September Truth Social article in which Trump wrote: “Interest rates in the United States should be 1 percent or less.” »
Diesel and the damage caused
Economists and investors pay close attention to so-called core inflation, which excludes volatility in food and energy prices. Both reports this week showed that even this adjusted measure of price growth is higher than expected.
“Core CPI was the biggest surprise,” Bank of America analysts wrote.
Key figures showed that soaring fuel prices, particularly diesel, are trickling down. Farmers, truckers and all those who keep commerce alive in the United States must raise their prices in order to digest the rising costs of diesel. This in turn leads to an increase in prices of consumer goods.
“The cost of diesel affects just about everything,” Diane Swonk, KPMG’s chief economist, told NBC News in an August interview. “Everything from…running a farm…the cost of food, but also anything that’s shipped throughout the economy gets extra fees. At the time, she described soaring diesel fuel prices as likely “an inflationary problem for the next few months.”
His warning came to fruition in September, according to this week’s reports on the Consumer Price Index and Producer Price Index. With diesel prices remaining solidly above $6 a gallon so far in October, and with no sign that the war in Iran is nearing an end or that attacks on energy assets in Ukraine’s war with Russia will be suspended, this could continue to fuel headline inflation for months.
Big Tech also fuels inflation. Trillion-dollar companies are spending and borrowing large sums on servers, memory and other components to be used in data centers. This caused prices to spike throughout the economy.
As a result, companies like Apple and Nintendo have increased their prices. “We have never seen the price of a component increase this much and this quickly,” Apple told NBC News in June.
Corporations are also exploiting public debt markets in unprecedented ways. Data center companies and related utility companies, chipmakers and cloud providers are expected to raise between $300 billion and $570 billion in the debt market this year, according to Vanguard. These companies also offer very attractive interest rates, sometimes better than U.S. Treasuries.
Warsh pointed out recently that a consequence of this is that there is also “competition for capital” that drives up interest rates on public debt.
“This is a complex set of things that affect the most important asset in the world, the 10-year Treasury,” Warsh said. “It is the risk-free asset to which every price of virtually every asset in the world is tied.”
Without referring to the war in Iran, he also said returns were determined by “geopolitics” and the strength of the economy.
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