Fed Chair Kevin Warsh reiterated the Fed's commitment to returning inflation to its 2% target but left rates unchanged as he emphasized patience and noted that tighter market conditions are already helping.

Warsh has launched five task forces to review Fed policy, but because these reviews are ongoing, Bauer believes the Fed may delay any rate hikes despite market expectations for a September increase.

Three Fed officials dissented and favored an immediate rate hike, citing inflation risks and geopolitical concerns. This leads Bauer to conclude that if the war does not come to an end soon, the Fed may have little choice but to raise rates later this year.

JRN by Bauer 43:30

“Will Deliver Price Stability” …Eventually

As we expected, the Federal Reserve kept interest rates unchanged at its two-day meeting last week. Although this decision did not surprise us, it did appear to come as a surprise to the markets. The markets seem to believe the Fed is falling behind in the inflation fight. To which we say, “It’s not falling behind; It has been behind for 63 months already”.

More important to us, or at least as important, is that for the first time ever, we must pay attention to what the Chairman of the Federal Reserve’s Open Market Committee (FOMC) doesn’t say as much as what he does say.

What Chair Kevin Warsh did say, among other things, was:

“The committee remains resolute – you’ve heard this before – that we will deliver price stability.”

“There is no soft inflation target. There is only a target and it’s 2%.”

Clearly baffled by the chairman’s remarks, one press conference attendee remarked, “You say you have no tolerance for inflation, yet you did nothing.” While that was not really a question, the answer that followed told us everything we needed to hear. “It takes time, you have to have patience, but it will be done.” That was followed by, “Market prices are tightening financial conditions on their own.”

Those statements got many people in an uproar. One even alluded to the Fed trying to get the markets to do its job, which we found humorous. If the markets could attain 2% inflation and full employment on their own, what a blessing that would be. But they can’t, at least not in the long run. If they could, we wouldn’t need the FOMC.

You may be aware of the five task forces Chair Warsh has created to examine and hopefully improve the FOMC’s processes:

• Communications - "My colleagues discussed possible improvements in the form and function of Fed communications. This new task force will build on that effort and, I expect, propose some well-considered changes."
• Balance Sheet Policy - "Review the benefits and risks of the current ample-reserves regime and the composition of the Fed's balance sheet … [and] assess alternative frameworks for the conduct and operation of monetary policy."
• Data Sources - "Evaluate new information sources and consider methodological changes to improve data gathering, with the aim of giving policymakers more accurate, relevant, contemporaneous, and, perhaps most important, actionable information on the state of our economy."
• Productivity and Jobs - "Survey the pace, the reach, [and] the economic impact of new general-purpose technologies, including AI, and explore the implications for the Fed in pursuit of our employment and inflation mandates."
• Inflation Frameworks - "Examine the drivers of inflation, first principles, and weigh the full range of ideas for delivering price stability in a changing economy."

(The above quotes are all from Chairman Kevin Warsh.)

What you may not be aware of is that the 15 people chosen to lead these task forces were selected, in part, because they have divergent views from one another. They are all respected leaders in their fields which are predominantly (60%) professors (including one Nobel Laureate), former central bank leaders (from Brazil, England, India and the U.S.), business executives (from Walmart and Microsoft), a Senior Fellow from one of Canada’s most influential think tanks, and a venture capitalist.

It is clear a lot of thought went into these choices. In fact, Chairman Warsh indicated that, not only does he know each of these individuals personally, but he made a point of choosing people with differing views on each task force. He is looking for each task force to have its own “family fight”. That’s a phrase you’ll hear repeatedly from Warsh. Perhaps a throwback, but it refers to when family disputes were debated over the kitchen table.

Policy recommendations from these family fights are expected by the end of this year. We assume each task force will present consensus recommendations, although that remains to be seen. Once the recommendations have been received, the FOMC will make decisions as to how, or even if, they will be adopted.

That may have been a long-winded way of saying this, but prediction markets are putting their odds on a rate increase at the September meeting. We are far less confident of that. We believe it is just as likely that Warsh will want to wait to assess these forthcoming recommendations before making any rate changes. After all, inflation has been over the Fed’s target for 63 months already, what difference will a few more months make? Unless of course… something changes.

Timing is everything in this game, continuing with Warsh’s analogy, “the market is learning to play the ball and not the referee”. (Maybe that’s true, maybe it’s not.) The Bank of England seemed to agree with the Fed as it left its key interest rate unchanged as well last week. Neither the Federal Reserve nor the Bank of England have changed their respective benchmark rate since December 2025, although the Bank of England did express a willingness to raise borrowing costs if needed (primarily dependent on the Strait of Hormuz being closed long enough to threaten a “persistent” pick-up in inflation). We assume the Federal Reserve is weighing that possibility as well. They won’t say so, but it certainly makes sense.

That same concern (war in the Middle East) could well be why three Fed officials dissented at this meeting. Each favored a quarter point rate increase now rather than waiting. All three are presidents of regional Federal Reserve Banks: Beth Hammack (Cleveland); Neel Kashkari (Minneapolis); and Lorie Logan (Dallas) so we turned to the latest Beige Book to get a sense of the sentiment in these regions.

In Cleveland both manufacturing and business activity increased some, but retailers were facing soft demand due to fuel prices. Prices rose robustly as a result. Bingo!

Minneapolis reported improvement in most areas except input price pressure remained elevated and agricultural conditions have deteriorated. In fact, several regions expressed concern over Ag conditions (concerning on different levels).

The Dallas region was the only one to mention uncertainty in geopolitical and domestic policies, which created a concern over inflation.

The other region with a vote this year, Philadelphia, voted to leave the fed funds rate unchanged. Philadelphia reported increased economic activity during the most recent period. A FIFA bump may have contributed to that, but its future expectations are positive as well.

With any luck, this conflict with Iran will be short-lived (although it has already gone on longer than anticipated). The longer the war lasts, leaving energy prices elevated, the more likely the chances that Chair Warsh and the FOMC will have no choice but to raise interest rates.