The Chairman of the Federal Reserve, Kevin Warsh, assured that he will not tolerate inflation above 2%, disappointing those who expected a lax monetary policy despite Trump's pressures.
The Chairman of the Federal Reserve, Kevin Warsh, delivered a clear message from Sintra (Portugal): there will be no room for complacency regarding inflation. During a panel organized by the European Central Bank, Warsh stated that those who expect the US central bank to tolerate inflation above 2% will be disappointed.
“If there are people in households, businesses, or financial markets who think that this central bank would be willing to tolerate inflation above the 2% target, I fear they would be disappointed,” Warsh declared. This statement serves as a cold shower for investors who were betting on a dovish shift following Donald Trump's arrival at the White House.
Independence against political pressures
Trump, who appointed Warsh in May, has repeatedly called for a rate cut. When directly asked if his warning of disappointment included the president, Warsh was blunt: “We have been an independent central bank for a long time. We will be an independent central bank at this moment and you will not see any changes in that regard.”
The statement takes on special relevance after the Supreme Court ruled that Trump cannot dismiss Fed Governor Lisa Cook, reaffirming the autonomy of the central bank. Warsh assured that the ruling will not alter the functioning of the institution.
Little forward guidance and caution in decisions
Warsh avoided giving hints about the upcoming rate meeting scheduled for July 28. “When we close the door” we will begin to deliberate, he said, refusing to comment on risks or factors framing the debate. This lack of forward guidance contrasts with the communication of previous Fed chairs.
At the same panel, other central bankers agreed to reject “forward guidance” and showed a general reluctance to anticipate moves. Warsh did comment on the impact of artificial intelligence, albeit in general terms: he stated that it is the Fed's responsibility to prevent AI from generating inflationary pressures.
For Spanish and European investors, Warsh's stance implies that monetary tightening in the US could be prolonged, which would keep the dollar strong and strain emerging markets. The Fed has raised rates by 525 basis points since 2022, and although inflation has moderated to 3.4%, it remains far from the 2% target.
The next key date will be July 28, when the Federal Open Market Committee (FOMC) decides whether to maintain rates at 5.5% or implement a new increase. Until then, Warsh has made it clear that he will not provide hints.
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