Fed chair Warsh opens the door to an interest rate hike

Kevin Warsh, the chair of the US Federal Reserve appointed by Donald Trump, surprised markets on Friday with a speech that hints at a possible interest rate increase. The stance contradicts the White House's expectations, which had counted on him for a looser monetary policy.

Warsh's address at the annual meeting in Jackson Hole, Wyoming, had been highly anticipated. Since taking office in May, the central banker had kept an unusually low communication profile.

"La priorità è ora la lotta contro l'inflazione" ("The priority now is the fight against inflation"), Warsh said, citing the war in the Middle East and the surge in energy prices. In central-bank language, such emphasis on prices usually signals tighter monetary policy ahead.

Markets and tension with Trump

Investors quickly revised their positions. According to the CME FedWatch tool, a rate hike is now the prevailing scenario, which would be the first since summer 2023.

The shift puts Warsh in a delicate position with Trump, who had chosen him precisely with a more expansionary monetary policy in mind. The president had previously waged a pressure campaign against his predecessor, Jerome Powell, who had defended the central bank's independence. Warsh did not publicly address the issue.

According to economist Heather Long, "Kevin Warsh ha aperto la porta a un aumento dei tassi" ("Kevin Warsh has opened the door to a rate increase"). "Probabilmente non avverrà a settembre, ma a ottobre o dicembre" ("It will probably not happen in September, but in October or December"), she added.

In July, US inflation stood at 3.7% year-on-year, well above the Fed's 2% target. Warsh warned that "abbiamo del lavoro da fare" ("we have work to do") if underlying inflation does not slow "chiaramente e sufficientemente rapidamente" ("clearly and quickly enough").

A rate hike would also raise the cost of US public debt and of credit for businesses and households. Whether the Fed holds the course set at Jackson Hole despite pressure from the White House remains to be seen: the institution's credibility, in the eyes of markets, will also be measured by that consistency.