The Fed held today. Three members dissented and wanted a hike, the biggest divide in 10 years.
In the press conference, for forty-five minutes the financial media expressed their displeasure with the decision. Inflation (PCE) is over 4%. Employment is full. Why aren't you raising rates?
AI capex is running hot. Oil prices have had wild surges.
Raise rates, slow the economy, cool the prices.
Bring demand down to meet supply.
That is the model the old Fed has run. Warsh says pushing demand down until it meets supply is "not my mental model."
He is not starting from the assumption that demand has to come down.
He described a race between supply and demand, and he is giving supply a chance to show itself.
Unlike the old Fed, a good economy doesn't have to be taken out back and shot. When demand outstrips supply, it should incentivize building — more productive capacity in the economy, more supply.
That leads to cooler price pressures, and a bigger, more robust economy.
And as we've said, the productivity gains from AI should be structurally disinflationary.
We know this is the Warsh view. He called productivity strong. And it's easy to see why he wants to give it more time, and it's also easy to see why the old Fed regime that still sits in the room wants to aim and fire at the culprit of hot demand (AI infrastructure).
Warsh fought off the room full of financial journalists that wanted their rate hike with this: "nominal and real yields are materially higher across the Treasury curve" … "market participants are learning to play the ball, not the referee."
So, he said rates are higher since the last time the Fed met. The market has tightened financial conditions in the past month, without the Fed's steering, or outright policy rate change.
That said, Warsh made this comment about the old Fed's preferred inflation gauge, PCE (which we'll get tomorrow, for the month of June) — he said, "I'm looking at a broader set of inflation data than PCE."
Remember, earlier this month, in a report prepared for Warsh's first Congressional testimony, he criticized the timeliness of the data the Fed depends on.
So, it's fair to assume he's looking at a mix of real-time data (private and public), as are the top companies in our economy. And with that, he reminded the room of journalists that inflation has been above the Fed's 2% target for 63 months. But for the 64th (which will be the July number) he says "the final calculation might be a close one."
If he's talking about core cpi, a negative 20 basis points for July would bring the year-over-year down to 2.0% — for the first time since March of 2021.
