Warsh Confronts Divided Committee as Fed Braces for Rate Hike

Federal Reserve Chairman Kevin Warsh is navigating a complex head count this week as policymakers prepare to decide on both immediate and future interest rate directions. While financial markets have priced in a near-certain 0.25 percentage point increase at the Wednesday meeting, the actual margin of support among the 12 Federal Open Market Committee (FOMC) voters remains uncertain.

Warsh also faces the challenge of messaging the decision. He must determine whether this will be a singular, rare hike, signal that additional increases are forthcoming, or maintain his historically cryptic stance of avoiding explicit forward guidance. Bill Dudley, former president of the New York Federal Reserve, told CNBC that failing to act would be shocking given current market expectations. “It would really damage his credibility because it would basically be all talk, no action,” Dudley said.

As of Monday afternoon, futures traders assigned a probability exceeding 92% to a rate increase this week, with more than a 75% chance of another move in December, according to the CME Group’s FedWatch tool. The benchmark overnight borrowing rate, known as Fed funds, currently sits between 3.50% and 3.75%. These heightened probabilities follow recent rises in fuel prices and August inflation data that showed continued price climbs. Both trends align with comments Warsh made a few weeks ago indicating the Fed would be compelled to act unless clearer signs emerged that inflation is returning to the central bank’s 2% target.

However, significant complications exist. Historically, the Fed has looked through inflationary trends driven by temporary factors. Economists broadly agree that much of this year’s inflation surge stems from tariffs and an energy supply shock linked to the Iran war, both of which have uncertain long-term implications for price stability.

Goldman Sachs economist David Mericle stated in a client note that the bank does not see a strong economic case for raising the funds rate, attributing the overshoot of the 2% target to one-time factors that are likely to fade. Despite this view, Goldman Sachs reversed its previous prediction of no change, now calling for a hike at this week’s meeting.

The question remains whether a similar outcome will occur with an FOMC that voted 9-3 to hold rates steady at the July meeting. The three dissenters then—Dallas Fed President Lorie Logan, Cleveland Fed President Beth Hammack, and Minneapolis Fed President Neel Kashkari—all supported a quarter-point increase at that time. Assuming their positions have not shifted, four additional members would need to switch from a hold to a hike.

Perhaps the most closely watched voter is Governor Christopher Waller. In remarks delivered on September 3, Waller indicated support for another hold, albeit with standard caveats about monitoring data to confirm disinflation trends. He urged patience rather than a rush to increase rates. “What’s the cost of waiting one meeting? Hiking 25 basis points, one meeting right now, is not going to bring the consumer price index down to 2%,” Waller said.

Latest CPI data for August showed headline inflation at 3.4%, while the core rate, which excludes volatile food and energy costs, came in at a more moderate 2.4%, down 0.1 percentage point from July.

Waller was not alone in advocating for a wait-and-see approach. New York Fed President John Williams told CNBC less than two weeks ago that delaying action seems reasonable. Earlier in the summer, Williams, whose position is traditionally part of the influential troika at the central bank, stated his belief that inflation has already peaked.

Meanwhile, Governor Michael Barr recently expressed concern that temporary inflation could become entrenched and indicated openness to a rate hike, though he is not firmly committed to one. Philadelphia Fed President Anna Paulson and Chicago Fed President Austan Goolsbee have also counseled patience, contrasting with Governor Lisa Cook, who stated in early August that she is prepared to act against inflation.

The FOMC breakdown leaves several key votes in play. Alongside the three July dissenters and Warsh, Governor Cook is expected to support a hike. This leaves Governors Philip Jefferson, the vice chair; former Chair Jerome Powell, who has maintained a low public profile since leaving office; and Michelle Bowman, whose last comments on monetary policy were in May when she warned against hiking unnecessarily due to inflation spikes.

A larger wildcard is whether fence-sitters will cross over to support a hike to present a united front. David Kelly, chief global strategist at JPMorgan Asset Management, noted that if a majority coalesces around a hike, other members may join to portray unity to the public and the President. This could result in a final vote with two, one, or no dissents.

The vote margin will reveal the depth of intellectual division between those viewing inflation as temporary and those seeing it as entrenched, while also signaling how effectively Warsh’s leadership is resonating within the Fed.

Following the vote, markets will examine the updated “dot plot,” which anonymously outlines rate expectations for all 19 participants. Investors will look for indications of conviction regarding two hikes this year and the outlook for 2027, which will also feature the first look at 2029 projections. The Fed rarely makes just one move, preferring cycles of incremental adjustments.

Mericle wrote that a 10-8 split favoring one hike would suggest some ambivalence about the initial increase. However, he added that there is a risk of a majority supporting two hikes if more participants view this week’s increase as a normal response to higher oil prices and AI-driven demand, marking the start of a series of rate hikes.

If the committee remains closely divided, attention will shift to Warsh’s Wednesday afternoon news conference and how he conveys FOMC sentiment. Dudley emphasized that the Fed needs to explain its economic thinking, adding, “Now [Warsh has] just got to follow that up with action. If he does that, I think he’s basically fixed the problem that he created in his first two press conferences.”