Federal Reserve Chairman Kevin Warsh testifies during a Senate Banking Committee hearing titled “The Semiannual Monetary Policy Report to the Congress” on Capitol Hill in Washington, July 15, 2026.
Ken Cedeno Afp | Getty Images
Federal Reserve Chairman Kevin Warsh is unlikely to rule out a rate hike at this week’s Fed meeting, for at least three reasons.
First, Warsh himself doesn’t seem to buy the travel arguments. Second, the promotion of standards can undermine the results of his working group. And, third, the rate increases the risk of putting him on the wrong side of some politics that is uncomfortable with the Trump administration.
And yet Warsh faces a divided Federal Open Market Committee, with perhaps three or four of the dozen voting members ready to call for an immediate rate hike. Investors see about a 40% chance of a rate hike this week, according to CME FedWatch. Warsh will face an uphill battle in the committee meeting to keep the numbers strong, so how he will address those three key reasons remains to be seen.
First, Warsh isn’t asking for high prices right now, and he hasn’t promised anything. He has committed to ending “forward guidance,” the practice of setting the Fed in advance on a specific course for interest rates. That means he won’t say in advance how he plans to vote when the FOMC meets.
But Warsh gave clues to the so-called response function, or how he and the Fed broadly interpret and respond to incoming data. Warsh specifically examined how data works on two major forces stressing the economy: rising energy prices since the Iran war, and rising costs of semiconductors and electronics as companies build their artificial intelligence capabilities.
Gasoline and diesel prices have risen in recent days after the US-Iran deal broke down. Warsh explained that in dismissive terms in Senate testimony on July 15: “Special price shocks occur at certain prices that we have no control over.” In other words, there is little the Fed can do in the short term to increase capacity at US refineries.
That could be a problem if rising energy prices appear to be pushing up prices broadly across the economy, but June consumer price index data released just before Warsh spoke showed broad prices actually falling before the latest return to the fight.
Some of Warsh’s colleagues at the Fed have warned that technology companies could raise prices on semiconductors, electronics and more as they spend more to build their artificial intelligence capabilities. But as a force, Warsh told the Senate he’s not really worried. He doesn’t look at “one-time changes in prices as inflation, because I think there is a supply response that way.”
The Fed will have to decide whether this particular change in supply and demand constitutes the kind of inflation that should be addressed with higher interest rates, Warsh said. In other words, the reaction function of the FOMC under his leadership will be clear after this meeting.
The second point is closely related. Warsh has established a series of task forces due to report in late 2026 and beyond that are intended to answer these types of questions in a permanent way. Can artificial intelligence accelerate growth without increasing prices? Is the Fed thinking the right way about overall inflation? There is potential for both.
If Warsh votes to raise interest rates in what will be his second FOMC meeting as chairman, he will essentially be agreeing with those arguments. The whole purpose of the team was to collect political money. Warsh will be better off achieving his goals later if he plays time now.
One of Warsh’s forces is dealing with questions like how often should the Fed hold press conferences? Another reason he can skip this.
On the other hand, if Warsh surprises and raises rates, that will be a significant sign that he sees the current inflation situation — and the risks to the Fed’s credibility — so seriously that he is willing to scale back his signature reform effort.
The third is a specific political consideration. Warsh has said loud and clear that he will make his own decisions on interest rates, regardless of what President Donald Trump says. But that doesn’t mean Warsh is ignoring Trump entirely.
Warsh could use more allies on the Federal Reserve board. The next opportunity to acquire one will come when former Chairman Jerome Powell leaves the board. He can stay until January 2028, but he could leave sooner if the Fed’s inspector general issues a clean bill of health in his investigation into Fed stimulus spending — and if Trump’s Justice Department chooses to leave Powell alone after the report.
That report is due this summer, Warsh said. Powell may see fit to resign.
But that would require Trump to resist the urge to impeach him, which is proving difficult. Trump said on Monday that he wants interest rates to fall, but noted that the Fed board is the problem. “You need the approval of other people who may have bad intentions,” Trump said, referring to Powell.
Politics here is serious. Warsh should avoid giving Trump opportunities to attack Powell. This week’s rate hikes will play on strong views that Powell is the “secret Fed chair,” as Treasury Secretary Scott Bessent described him. And even if Powell does indeed resign after the IG report, Warsh will want others to speak in Powell’s place — to control Trump’s nominations. Warsh cannot completely ignore the president.
Warsh could provide clues about the IG’s report at the meeting, as well as a second, outside investigation into the Fed’s handling of the banking crisis in 2023 that worries could be used as a pretext to fire board members.
It is impossible to cleanly predict what the Fed will do, for the simple reason that the Fed’s results are no longer determined in advance. Warsh will soon have to deliver the first rate hike of his tenure. But for now, he has good reason to hold back, just for a while.
