Kevin Warsh’s speech last Friday in Jackson Hole was a good one. It was the speech he needed to give. Warsh opened with AI—100% human-written text, I checked. Then he turned to his arguments against forward guidance, his seven principles of monetary policy, and closed with a discussion of how he sees the economy now, including his first analysis of inflation data. Warsh came down from 30,000 feet and found firmer footing. The speech was true to Kevin Warsh, and it was the first time he sounded like a Fed Chair. That’s only the first step to being a good Chair, but an important one.

Clean up and bridge building

Warsh cleared up two areas of confusion from his July presser, ones that I have written about. First, he was clear on the target: “The Fed's price-stability objective of 2 percent, as measured by the personal consumption expenditures (PCE) price index, is a firm, fixed target.” Firm and fixed. That’s a much better answer than in July. Warsh also resolved confusion over the Fed’s tools. He set the balance sheet to the side for now, saying “short-term interest rates are the predominant tool to achieve the dual mandate.” So, if the Fed tightens this year, it’s the federal funds rate rising, not the balance sheet shrinking. None of this suggests Warsh is happy with the size of the balance sheet, but the speech carefully pushed reform ideas into the future and elevated the tried-and-true for the present. Playing the long game is the right way to pursue change at the Fed.

It was more subtle, but it was good to see Warsh building bridges to the Committee. Many picked up on the fact that Warsh started with a story about hiking, the literal in-the-Tetons kind, not the rate-increase kind. As I said, this was a Warsh speech. What grabbed my attention: the first name in the speech, part of the hiking story, was Don Kohn. I can’t think of another living person more widely beloved at the Fed, Committee and staff, past and present, than Kohn. I heard Kohn’s name and took a deep breath. Warsh’s speech was going to be good. Building a consensus is hard work, and his speech was unlikely to have repaired all the damage of the presser.

It was a good speech. To be clear, I disagreed with several parts, above all Warsh's calls for a "quieter" Fed. Now there's enough substance for a good family fight.

Inflation, inflation, inflation.

What will matter most to people is the closing of Warsh’s speech: an assessment of the economy today. That’s a critical starting point when the FOMC meets in two weeks to decide whether to raise rates or to remain on hold.

Warsh first shared the Committee’s views, including the reason for the hold, a welcome clean-up of the presser:

You may have read in the July minutes the unanimous view of the FOMC: Labor markets were stable, and output was solid. But inflation remained too high. A good majority of my colleagues and I thought the wiser course was to await new information in the intermeeting period—especially given possible developments in supply chains, investment flows, and geopolitics—before deciding whether a change in interest rate policy was advisable. And we expressed our joint readiness to act as circumstances might require. (Emphasis added.)

Then Warsh turned to his views:

For my part, today I am impressed by the overall performance of the economy, which appears to have strengthened. One indicator of strength is how well an economy holds up to shocks. On that score, both Main Street and Wall Street have been remarkably resilient.

He didn’t stop at the high level. He went through various parts of the economy: business capital expenditures, corporate profits, credit spreads, lending standards, housing, agriculture, consumer spending, and private domestic final purchases. It might not be the exact summary I would offer, but it was data-driven in a way that’s rare for Warsh and common for Fed Chairs.

On the employment side of the mandate, Warsh described the labor market as “stable” and “consistent with full employment.” Again, he marshaled the data: payrolls, the unemployment rate, initial unemployment claims, JOLTS, and slow growth in labor supply to make his argument.

On inflation, Warsh’s assessment was downbeat, positioning him closer to the Fed officials who have already said they want a hike than to those who have voted to hold:

But on the price-stability side of our mandate, the numbers are more concerning. The Fed’s preferred measure of inflation, the 12-month change in the PCE price index, stands at 3.7 percent, while the six-month change is 4.1 percent. The comparable measures from the consumer price index (CPI) are also elevated, as are the core measures of both PCE and CPI inflation. None of these measures are perfect, but they all tell a similar story: Inflation is running above our 2 percent target. So the Fed’s predominant focus right now should be on prices.

Importantly, Warsh does not seem impressed by the softer inflation prints recently:

And while this summer’s PCE and CPI readings were better than expected, they do not tell me that underlying trends have meaningfully improved.

After a nod to wages, which he does not view as a reliable signal of trend inflation, Warsh discussed the distribution of inflation:

To try to gauge underlying inflation, I find it instructive to disaggregate the 199 individual components of the PCE price measure. Over the past 12 months, 54 percent of goods and services in the PCE basket showed price increases above 3 percent. This is well below the post-pandemic highs of about 77 percent, but it remains well above the level of 32 percent in the two decades that preceded the pandemic.

Breadth fits with his past references to median and trimmed mean measures. Warsh did not include a chart in the speech, but the one I made below replicates his share of categories with prices rising more than 3% (blue line). The share of spending counterpart (gray line) is even higher, because a few heavy categories, owners’ equivalent rent above all, sit over 3%. Headline inflation is elevated, and it's not a handful of outliers doing the work. The breadth is elevated, too.

Warsh flagged commodity prices and inflation expectations as factors to watch. He closed with accountability and a confidence test:

There is one signal nobody can miss: The responsibility for 65 months of sustained, elevated inflation sits squarely with the central bank. And that is where it belongs.

Here is my standard: We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do. That’s our job . . . our mandate . . . and our charge to keep.

That is the question each FOMC member faces in September. Confident inflation is coming down soon with the federal funds rate where it is, then hold. If not, it's time to raise rates. Warsh did not share his verdict, nor the Committee's. That would have been the forward guidance he wants to dial back. But he shared his framework, and it's consistent with the July minutes. Now we wait for the remaining data and the FOMC's judgment.

In closing.

After Jackson Hole, Kevin Warsh is less of an enigma. We have more clarity on his views about monetary policy—some are traditional, and some are not. The FOMC will sort that out over the coming years. We also saw him take on the familiar role of a Fed Chair, narrating the economy with data and using them to set up the Committee’s deliberations later this month. The Jackson Hole speech doesn’t make the decision any easier, but it should help us rest easier about the process.

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PS: It’s not just me. Puffi was also a fan of Warsh’s speech. She weighed in on Twitter Friday night.

Yesterday, the Fed published the minutes of its July FOMC meeting. Together with the statement and the press conference directly after the meeting three weeks ago, we now have a fairly complete picture of Kevin Warsh’s second meeting as Chair, and it’s an unusual picture. The Chair's account of the decision to hold and the Committee's record of it do not tell the same story. Warsh came to the Fed calling for regime change, and signs suggest change is well underway, at least in how the Fed communicates. As today’s post explains, there are lessons for investors and the public in how to listen to the Fed.

Press Conference 101

Expectations are central in the conduct of monetary policy, and that includes expectations about the press conference.

On March 24, 2011, a week before Kevin Warsh stepped down as a Fed Governor, the Fed announced that it would hold regular press conferences; it gave the following explanation:

Chairman Ben S. Bernanke will hold press briefings four times per year to present the Federal Open Market Committee's current economic projections and to provide additional context for the FOMC's policy decisions …

The introduction of regular press briefings is intended to further enhance the clarity and timeliness of the Federal Reserve's monetary policy communication. The Federal Reserve will continue to review its communications practices in the interest of ensuring accountability and increasing public understanding.

Alongside presenting the forecasts (a tool of forward guidance), the purpose was to explain the current decision. The overarching intent was greater accountability and public understanding.

At the first press conference on April 27, 2011, in his opening remarks, Ben Bernanke explained the role of the Chair in that setting:

Throughout today’s briefing, my goal will be to reflect the consensus of the Committee, while taking note of the diversity of views as appropriate. Of course, my remarks and interpretations are my own responsibility.

Later in the press conference, Bernanke was asked to elaborate on why the Fed took that historic step. He set the press conference in the context of years of efforts to increase transparency at the Fed. The principles were clear:

And I personally have always been a big believer in providing as much information as you can to help the public understand what you're doing … and to be accountable to the public for what you're doing. … the counterargument has always been … that the Chairman speaking might create unnecessary volatility in financial markets … It was our judgment, after thinking about this for some time, that at this point, the additional benefits from more information, more transparency, meeting the press directly, outweigh some of these … risks.

Accountability has been the core goal from the start, and the Chair is the Committee’s messenger. In July, Warsh fell short on both counts, breaking a precedent set in his final week at the Board fifteen years ago.

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Why did the Fed hold rates in July?

At the time of the July meeting, PCE inflation was an estimated 3.7% and had been above the Fed’s 2% target for more than five years, while the unemployment rate was low and steady. In the statement, the FOMC reasserted its commitment to deliver price stability, so why did it leave the federal funds rate unchanged?

The FOMC minutes that we received this week offer an explanation (the details are in the “Participants' Views” section): most Fed officials believed inflation would step down over the rest of the year as the inflationary effects of energy supply disruptions and tariffs wane. The soft inflation data in June supported that thesis, but it was not decisive. The labor market was in balance, with unemployment near its longer-run level, so there was no urgency from the other side of the mandate. Officials also noted that little had changed in their assessments since the June meeting only six weeks earlier. Holding rates in July allowed the Fed to gather more information before its September meeting. The Committee saw inflation risks as skewed to the upside, and many officials would favor raising rates if inflation does not decline. Several were already in favor of a hike in July, including the three voting dissenters.

Whether you agree or disagree with its decision to hold, the Committee’s explanation is firmly anchored in economic data and uses risk-management principles familiar to the Fed. The FOMC has not undergone a regime change in how it decides policy.

Scroll back three weeks to Warsh’s press conference; that’s where the regime change was, and it went well beyond the lack of guidance about future Fed actions. Warsh did not accurately explain the Committee’s current decision or its thinking about economic and financial market developments. Investors and the public, with only Warsh’s words and a nearly unchanged statement after the meeting, had to wait three weeks for the minutes to correct the record.

Do the data matter?

At the press conference, several journalists asked Warsh about the decision to hold rates. Claire Jones from the Financial Times asked whether the cool June CPI print played a role. Warsh downplayed the inflation data:

So, in two words, not much—not much—I'd like to believe that the Committee shares my views, which is the historic problem with data dependence is the data and the dependence. We are not relying on any one individual piece of data as cover or as an excuse or as validation. What I care about, and what I think the Committee cares about, is trends on the data. Sure, we got some encouraging inflation data. … So we'll be—we'll be watching inflation data over the period ahead, but I also don't want you to leave the misimpression that we're sort of breathlessly waiting that. … I wouldn't say we overly relied on, on any one piece of data, including that data, which surprised some a couple of weeks ago. [Emphasis added.]

I remember being puzzled by that answer and near certain the Committee did not share his views. I was right. Per the minutes, "most participants anticipated that inflation would step down over the rest of the year," and the June data were the first evidence for that thesis. Jones had it right: the cool print was part of the hold narrative. More striking is Warsh’s "breathlessly waiting" line. The Committee's stated reason for holding was that information arriving before September "could provide more clarity" about the inflation outlook. Waiting for data was not a misimpression to be corrected; it was the rationale.

Was there a pause?

Edward Lawrence at Fox Business pressed Warsh to “drill down” and explain specifically what the reason for the pause was. Warsh questioned the premise:

So I wouldn't characterize what we did as anything like a pause. I would characterize what we did as a rigorous review of the economic situation. I would characterize what we did as a review of the big, hard questions. … If you were to try to force a description that this was a pause, I would say financial market prices would take the other side of that. … Did the Fed take an explicit change in its policy rate today? No. But I think that's the beginning of the story, not the end of the story.

Let's start with the facts, since Warsh says the statement offers just the facts: "the Committee decided to maintain the target range for the federal funds rate at 3-1/2 to 3-3/4 percent." That's a pause. And the minutes don't dance around it: the Committee held because information arriving before September "could provide more clarity" about inflation. Waiting for clarity is what a pause is. Warsh called the decision “the beginning of the story, not the end of the story.” Fair enough. But the Chair is the Fed's storyteller, and this one is proving unreliable.

Did markets do the Fed’s job?

In a series of replies to Neil Irwin at Axios, Michael McKee at Bloomberg Radio and TV, and Ann Saphir at Reuters about the decision to hold, Warsh returned each time to the increase in market interest rates:

To Irwin:

So rates are higher today than they were 42 days ago. Markets have made decisions because we stepped back, in part, from trying to influence those. Market judgments have moved up on what nominal rates are across the Treasury curve … And these prices that we see in financial markets is one of the many ways in which [monetary policy] affects the real economy. We’ll be continuing to watch that market information—see how it responds to incoming events—and that can help inform our decisionmaking when we meet in seven or eight weeks.

To McKee:

And so, so if I look at the Treasury curve, if I look at the dollar, if I look at a lot of things that are internals inside of financial markets, I think what they’re broadly saying is that this Committee does own it—has the credibility to deliver it. And they believe, like I do, that we will. But I don’t want to leave you with a misimpression—we’ve got no magic wand. This isn’t something that we’re going to be able to carry out in days or weeks. But we’re going to deliver on the responsibility that Congress gave us, and today’s meeting—and the preparation for today’s meeting—was an important step towards that destination.

To Saphir:

We’re going to deliver on the remit. You don’t have to take my word for it. If you look broadly at market prices, they are certainly not saying “all clear,” but they are working in concert to, to keep us on our toes, and they have tightened financial conditions in this intermeeting period. And, and that has given us a—that has provided us some—some comfort that, that we’ve got the ability and capability to deliver.

Warsh’s emphasis on financial markets is one of his defining characteristics as Chair, but the minutes show it is not a defining characteristic of the Warsh Fed. Nowhere in the minutes are higher market rates cited as the reason for the Fed’s hold. In fact, they said, “various participants suggested that financial conditions had tightened over the intermeeting period … partly a reflection of strong economic growth and market expectations that the Committee would adopt a more restrictive policy stance before long.” In minutes parlance, “various” is far short of a consensus, and even those participants did not suggest higher market rates were a substitute for Fed action. They described it as markets anticipating a hike. The Fed’s own markets desk told the Committee the same thing: financial markets had fully priced a 25 basis point hike by the September meeting.

Markets do not do the Fed’s job for it; they are expecting the Fed to do its job. It’s unsurprising that as markets heard Warsh speak, they cut the September pricing. If the Committee had been at the podium instead, the reaction might have been different. The back-and-forth in the Fed’s messaging has real-world consequences.

What are you reacting to?

Jonnelle Marte at Bloomberg asked Warsh about his reaction function directly, and Warsh answered with a reaction function, but it was his own, not the Committee's:

… Any central banker, especially a central banker where the labor markets are more or less at equilibrium—any central banker, when he or she sees underlying inflation moving higher—he or she is more inclined to tighten policy. Again, when you’ve achieved the other side of your mandate and you see underlying inflation falling, he’s more inclined to loosen policy.

That’s my reaction function, and I don’t suspect it will cause people to not continue to pry for more …

Warsh’s simple reaction function misses the actual challenge facing the Committee. The question is not whether inflation is moving higher; it’s whether it is moving down to 2%. That’s clear in the minutes, where the closest-to-consensus reaction function is: “many participants assessed that policy tightening would likely be necessary if inflation did not decline.” The gap between Warsh’s reaction function and the Committee’s is information. It takes seven votes to change policy. Warsh has one. The rest of the Committee has eleven. Heading into September’s vote, follow the Committee's framing, not the Chair's.

In closing.

Comparing the Committee's words in the minutes with the Chair's at the press conference was the point of this post: the regime change is real, and it is not where Warsh says it is. Forward guidance is gone from the press conference, but so is an accurate description of the Committee's decision. Dropping forward guidance is defensible; dropping accountability is not. Warsh says the statement offers just the facts. Why the Committee held is a fact, too, and it was missing on decision day. Warsh brings new priorities and new ideas to the Fed; that is his right as Chair, and innovation can serve the institution well. But the old rule of thumb, that the Chair speaks for the Committee, does not yet apply to this one. Until it does, downweight the presser and upweight the minutes. The question I would put to Warsh: how does confusion, sold as regime change, improve monetary policy?

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A week from Friday, Kevin Warsh will deliver his first speech as Chair at the Fed’s Jackson Hole Symposium. The majestic backdrop of the Grand Teton is a world away from the Fed’s stuffy offices in DC, but the test will be the same as at every press conference: what does Warsh say? In today’s post, I offer perspectives on the first Jackson Hole speeches of the three previous Fed Chairs, what I want to hear from Warsh, and why a strong, credible Fed matters more than ever.

What’s in a Jackson Hole speech?

With the benefit of hindsight, a Fed Chair’s first speech at Jackson Hole has been a window into their economic worldview and their style as a central banker:

Ben Bernanke, August 25, 2006
“Global Economic Integration: What’s New and What’s Not?”
The economic historian. Bernanke’s first Jackson Hole speech on globalization is the most academic and least connected to monetary policy among the three recent Chairs, but it reveals the quality that proved critical to his tenure as Fed Chair: a deep appreciation for history. Keeping the Fed from repeating the mistakes of the Great Depression is central to his legacy. Bernanke’s speech also highlighted the interconnectedness in global markets—ties that would be severely tested in the Global Financial Crisis just a few years later.

Janet Yellen, August 22, 2014
“Labor Market Dynamics and Monetary Policy.”
The defender of the employment mandate. Over her long career at the Fed, Janet Yellen arguably did more than anyone to sharpen the Fed’s thinking around its maximum employment mandate. Her first Jackson Hole speech as Chair is an expansive treatment of the concerns at that time about the labor market and how to determine whether there is cyclical slack or a structural shortfall. In her trademark meticulous style, Yellen doesn’t just address the top explanations but goes through all of them. She concluded that the labor market recovery was incomplete. Yellen would lead the Fed to its first rate increase since the Great Recession more than a year later, and was already setting a tone of careful deliberation.

Jerome Powell, August 24, 2018
“Monetary Policy in a Changing Economy.”
The risk manager, skeptical of false precision. Powell’s first Jackson Hole speech ties most directly to monetary policy, specifically how to make policy decisions under uncertainty. He draws on theoretical concepts, like r-star, the neutral rate of interest, but warns that we cannot know them precisely. Powell also discusses the Brainard principle, which suggests taking small steps under uncertainty is best unless there is a risk of a trap that would be hard to escape. As Chair, Powell led the Fed through a series of unexpected events: a global pandemic, two trade wars, two major energy disruptions, and attacks on the Fed’s independence. He put the principles in his speech into action. The gradualism was costly with pandemic inflation, but the Fed’s aggressive pivot to hiking in 2022 produced the closest thing to a soft landing in generations.

I enjoyed re-reading those three speeches. Three people with different styles and facing different challenges. There’s no one formula for a strong Fed Chair.

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What about Warsh?

So, what will Kevin Warsh’s entry into Jackson Hole history books be? That’s the question everyone is asking, but only one person knows the answer. And I hear he doesn’t like to talk.

The trait most likely to define Warsh’s Jackson Hole speech is his advocacy for regime change. Warsh has built his case for change for years by criticizing the Fed's models, data, and decisions. Now as Chair, he has set up task forces to make proposals. As the Financial Times notes, Warsh talks more about process (pink bars) than recent Fed Chairs who talked more about economic data (blue bars). That emphasis on process fits with someone devoted to regime change.

I don’t mind the process; it’s the lack of details that is endangering Warsh’s credibility. We have a clear sense of what Warsh doesn’t like at the Fed, but very little sense of what he’s proposing as a replacement. His Jackson Hole speech is an opportunity to bring depth to his vision for process improvements. Pick any part of his regime change and defend it. There are many options: He can explain why he believes financial markets are the most important source of information for the Fed, what he means by a new Treasury-Fed Accord, or why he thinks reducing the balance sheet is currently an alternative to a funds rate increase. It’s time to come down from 30,000 feet.

Keeping it in perspective.

Warsh’s Jackson Hole speech is about more than Warsh; it’s about the Fed as a credible institution. Every Fed Chair is tested, and for decades they have risen to the challenge. The stakes are higher now, with the White House openly pressuring the Fed.

In a recent HFR podcast, I discussed the risk of fiscal dominance, including Kevin Warsh’s call for a new Treasury-Fed Accord. There is a benign interpretation: a large Fed balance sheet and a large federal debt require the two to talk more. And there is a less benign one:

There is a less benign version where you have a lot more coordination between the Treasury and the Fed, where the Treasury might actually be giving marching orders to the Fed. The Treasury, in helping support the yen, was able to use tools that the Treasury itself had, but Secretary Bessent had pointed out that if the Fed raised the cap on their facilities, this could do even more. The Treasury has tools to do interventions. The Fed’s got bigger tools. If you get in a place where we’re handing the keys of the Fed’s balance sheet over to the Treasury to say “get interest rates low,” because they want to do more borrowing, that’s a real inflation risk. That’s not a history we want to repeat. This was exactly one of those cases where Warsh just throws something out there that could mean a lot of different things, but there’s some real risk there.

… A big overarching label for it would be fiscal dominance, so that the fiscal authority, White House, Treasury, they’re the ones calling the shots on monetary policy … There’s a lot in the institution at the Fed that protects the Fed from having this happen. But the reality, the backdrop with the government debt as large as it is, the incentives are really there. So, as I said, a risk. Not my base case, not where I think we’re headed, but there’s just been actions by Treasury that make me concerned that it could bleed over into the Fed. And some of Warsh’s messaging hasn’t been as clear as I’d want. We’re turning the first few pages of the fiscal dominance book. We’re not far into it, but I think it’s a real risk and certainly should be a risk for anyone in bond markets.

The rest of the conversation covers labor markets, housing, and Warsh and Fed culture. Audio and transcript here.

In closing.

I am looking forward to Warsh’s Jackson Hole speech. I expect to learn more about his thinking. I may not agree with his arguments, but I really want to hear them. His 30,000-foot claims and catchy slogans leave too many blanks. So far, Warsh is a bit of a Rorschach test. His critics read the worst into the blank spaces and his supporters the best. I just want to know who Kevin Warsh is and how his regime-change ideas would allow the Fed to better serve the American people.

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Today’s post is for paid subscribers only. Let me start by thanking you for your support of my writing here. I haven’t had much paid-only content for a while, as many of you know, and I'm glad to be writing more again. I want to make sure you feel valued, because you are! I also want to make sure you're getting the kind of analysis that brought you here.

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Yesterday, we got his answer. A half hour into the press conference, Paul Wiseman of the Associated Press asked the question:

WISEMAN: When you talk about the 2 percent inflation target, what measure are you relying on?

Today’s post is about Warsh’s answer, but let’s start with the correct answer: PCE inflation. That’s been the Fed’s official target measure of inflation since 2012. Warsh started out down that path, albeit a winding one:

WARSH: Yeah, so, I'll give two answers. First let me give the proper standard answer, the Federal Reserve every January outlines a statement of purposes and strategy, and in that strategy document, which I believe was dated January of this year, it describes a measure of PCE inflation as the -- as the objective function there. I have enough of my -- so that's our number, we're sticking with it.

His label of a “proper standard answer” comes across as grudging, but Warsh nailed the landing: “PCE … We’re sticking with it.” Unfortunately, Warsh did not stop there. The next part is where problems crept in:

Who knows come after next January what we might say about strategy. I suspect the task forces might have something to add.

That's the part that should worry you: Warsh is using PCE as the yardstick now, but he suggested he might pick a different inflation measure in January 2027. Choosing a new inflation measure that reads 2% is not achieving price stability; it's destroying the Fed's credibility.

The January vote is a routine reaffirmation of the Longer-Run Goals and Strategy statement, not a framework review. The Fed just completed its intensive, five-year review last year, and deliberately kept the target off the table. Since the first statement in 2012, the January vote has only ever affirmed the use of PCE inflation, never questioned it. And he pointed to his handpicked task forces as the ones who might drive that change.

And Warsh kept going:

But I'll say this, some version of the Lucas critique, some version of Goodhart's Law in economics, should remind us that when we talk about measures of inflation or something else, and we describe those measures as being consistent with our objectives, we might make them such that they're not very good measures or very good objectives.

The Lucas critique and Goodhart's law are irrelevant to a question about which inflation measure the Fed targets. The target isn't an economic relationship that shifts as people respond to policy. It's a measurement. There are real concerns you can raise about PCE as an inflation measure, but Lucas and Goodhart aren't among them.

Warsh wraps up his answer on the inflation target by talking about underlying inflation—a different concept altogether:

Broadly, if you said to me standing in front of you, I abide fully by the strategy document, we're going to deliver 2 percent inflation, and not a whisper more, but to achieve that, I'm looking at a broader set of inflation data than PCE. So, without sort of fully revealing my cards, I'm trying to understand like my colleagues, what's the underlying generalized change in prices that are happening in the economy. It is not a perfect science. I might have said 42 days ago, I've got a task force for that. But we have a data project that's trying to look and see whether we can't separate the noise from the signal. And so if you would hear a message from me, yes, I care about what the PCE prints are, I care about what the contributions are from CPI and everything else, but my -- my lens is broader than that. Even though the remit is quite narrow.

The Fed has one target (2% PCE inflation) and many ways to assess whether we are moving toward the target (measures of underlying inflation). It's fine, and standard, for Warsh to watch core, trimmed mean, median, and anything else that helps read the trend. Those tell him where inflation is heading. But the goal, the thing he's accountable for hitting, is PCE inflation.

One last part of his reply is worth flagging: Warsh’s “without sort of fully revealing my cards” approach was a running theme during the entire press conference. Warsh doesn’t say much, not about policy, not about data. On Marketplace, before the meeting, I said that it’s “unsettling” to have a Chair who doesn’t talk about the data. That concern remains.

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In closing

Warsh’s answers are not an academic exercise. They are graded in the real world. The answer to this question on the target inflation measure and several others during his 45-minute press conference raised real concerns about Warsh’s commitment to fighting inflation.

The reaction in financial markets was swift and unmistakable. Stocks, bonds, and the dollar all fell during his remarks. The 30-year Treasury yield jumped to its highest since 2007, and markets pared the odds of a near-term hike. These moves came during the press conference, not on the decision to hold, and they were large for a Fed meeting.

This was only Warsh’s second meeting, so there’s time to course correct. Warsh keeps invoking first principles. Here's one: commit to PCE, stand by it, and deliver on it.

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Most of the coverage heading into this week’s meeting has focused on Fed Chair Kevin Warsh—whether it’s his low-information communication style or a need to establish his inflation-fighting credibility. The Chair matters, but the Fed is run by a committee, so it’s also critical to understand the committee’s thinking. The FOMC statement at 2 pm, which precedes Warsh’s press conference at 2:30 pm, may be our best window—short, but insightful—into where the Fed is headed. Today’s post offers my mockup of the statement. More important than the exact wording are the themes to watch for.

A new statement

The FOMC statement issued directly after every meeting since January 2000, and after every policy change since 1994, comes, as its name suggests, from the committee. The longstanding practice has been for the Fed staff to mock up three statements—the baseline, a more hawkish, and a more dovish statement—as part of the materials that go to the committee before the meeting. The final version reflects the decisions made at the meeting and any edits to the text that the committee can agree on. The exact details of the process have shifted some under Warsh. He said at the last press conference there was "one proposal on the table," not three, at the meeting. He also wants a short statement and no hints about the future direction of the federal funds rate. Even so, the broad contour of a consensus statement from the committee remains.

A short statement does not mean a weak statement. When Warsh headed an external review of communications at the Bank of England, he recommended the following:

The Bank should make public a concise summary of its policy decision and rationale as soon as is practicable upon the meeting's conclusion. This summary should encapsulate the MPC consensus. And the votes of individual Committee members should be stated in the policy summary. [Emphasis added in bold.]

That recommendation followed from how his review defined effective communication:

The effective communication of the immediate policy decision is important; so too is communication about the prospective contours of the economy and policy stance. A well-communicated policy is one which helps economic agents – households, businesses, financial markets – to understand the likely reaction function of policymakers to incoming information.

In keeping with the short-but-informative format that Warsh favors—and reflecting comments from Fed officials and the data since the June meeting—here is my mockup of the July FOMC statement:

It follows the basic structure of the June statement: 1) policy decision (fed funds rate and the balance sheet); 2) summary of economic activity and the labor market; 3) summary of inflation. It's slightly longer but still brief by Fed standards, and it leans toward rewriting rather than recycling words from the last statement. That said, some of the changes I am offering are substantive and reflect how I think the committee might want to move the statement. My mockup also reflects Warsh's own recommendations in the Bank of England review.

Changes in the statement.

The policy decision.

I expect the Fed to hold rates steady in July and not change its balance sheet policy:

The Committee decided to maintain the target range for the federal funds rate at 3-1/2 to 3-3/4 percent and ample reserves in the banking system, in support of the Federal Reserve’s dual mandate.

Market-implied odds of a rate hike are about 30% going into the meeting—unusually high this close to a decision, when the outcome is normally fully priced. Even so, it's more likely we'll see a few dissents in favor of a hike rather than a hike. As I told the Financial Times:

“They’re going to be talking seriously about the pros and cons of a rate hike,” said Claudia Sahm. “But looking at the commentary from various Fed officials, I just don’t see a majority in favour of raising rates already.”

Counting votes from public commentary is not a precise science, but it takes seven to make a majority, and only two have been making a strong case for hikes now. The decision paragraph in the statement satisfies Warsh’s criterion of a “concise summary of its policy decision.” But that’s only the first step.

Why did you do it and what would change policy?

The June statement said what the policy decision was and committed to deliver price stability, but it was missing that “rationale” or the “reaction function,” as Warsh had recommended to the Bank of England. If inflation is high, why hold rates constant? And what would it take to get a rate hike? Note that’s not asking for a prediction of future policy (forward guidance); it’s asking for a contingency plan. Since becoming Chair, Warsh has been unwilling to answer those questions at his public events. There are reasons to be cautious about unscripted remarks. So move it to the statement. It’s a committee agreement, not the Chair’s words. Of course, he would need to be willing to sign on to the text or register a dissent to it.

My inflation paragraph tries to convey the rationale and reaction function that I have heard from Fed officials and in the FOMC minutes of the June meeting. In a previous post, I discussed how the two scenarios in the minutes offered a reaction function for the Fed. But waiting three weeks for the minutes is too long a delay—it would be better to put a shortened version of it into the same-day statement:

Despite recent improvement, inflation is above the Committee’s 2 percent goal, in part reflecting supply shocks from the conflict in the Middle East and tariffs, as well as strong AI-related demand. If inflation remains elevated amid stable labor markets, some policy firming may be warranted soon to deliver price stability.

Why hold rates if inflation is too high? The strongest argument against a July hike is that the June inflation data were softer than expected, and the improvement was not limited to energy prices. Non-housing core services, which I previously flagged as a reason trend inflation is likely above 2%, were notably weak. Some outlier declines are unlikely to recur, but the latest read chipped away at the unusual strength from around the turn of the year. Holding now to gather more information about inflation is defensible, especially when so much of it is driven by supply shocks.

What would it take to raise rates? Inflation has been above 2% for more than five years, and the supply shocks from the Middle East and tariffs remain live wires, so holding the fed funds rate indefinitely raises questions. “What’s the plan?” is a reasonable question to ask the Fed, and it will come up at the press conference. Better a scripted, voted-on answer in the statement than Warsh dodging it with “we will meet again in seven weeks.”

Say the quiet parts out loud.

My mockup of the statement includes a callout to the maximum employment mandate in the economic activity and employment paragraph:

Economic activity continues to advance at a solid pace, driven by strong gains in business capital investment and resilient consumer spending. Job gains softened some recently, but the unemployment rate remains low. The labor market is broadly consistent with the maximum employment mandate.

The reason the Fed is emphasizing price stability now is that inflation is a problem for them, while employment is not. One could have misread the omission of maximum employment in the June statement as downgrading the importance of employment.

The June statement did not list the names of the committee members who voted. When it’s a unanimous decision, that’s fine. We can look up the committee on the webpage. However, if there are dissents this week, the statement should include their names:

The two dissenters, Beth Hammack and Lorie Logan, favored raising the federal funds rate at this meeting.

That’s consistent with Warsh’s recommendation to the Bank of England, too. Guessing games would be highly unproductive, particularly when the Chair is being guarded about his views.

In closing.

Pay close attention to the FOMC statement at 2 pm. The statement is where we get the decision and the vote count—that much is always true. For the past several years, the explanation came a half hour later, at the press conference. Warsh doesn't seem to use the presser that way, so with him as Chair, the statement might offer the clearest answer we get on the why and what's next of monetary policy. Many of the fights I remember from my time at the Fed were over who held the editing pen. I can only imagine the fight over the pen at this meeting. It's a good family fight, one determined to get policy and its communication right.

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Kevin Warsh is a man of catchphrases: task force, first principles, a good family fight. Catchphrases can be useful if we all attach the same meaning to them. Two days of hearings before Congress this week clarified that when Warsh commits to “price stability,” he attaches a different meaning to it than the rest of the Fed does. When I read “the Committee will deliver price stability” in the June FOMC statement, I translated that as PCE inflation at 2% by 2028. When I hear Warsh say "price stability," I am now unsure what he means.

If we do not all agree on the yardstick, then a commitment to price stability is nearly meaningless. The yardstick also helps everyone see whether monetary policy is working or whether the Fed needs to change course. The Fed worries about unanchored inflation expectations; I am starting to worry about a Fed Chair who is unanchored from inflation data.

Why can I translate the FOMC statement, but I can’t translate Warsh? In 2012, the Fed adopted an explicit inflation target—it specified a level (2%) and a yardstick (the PCE price index). When anyone at the Fed says price stability, that's what they mean, and after fourteen Januaries of the FOMC reaffirming that definition, it's how everyone outside the Fed understands it, too:

FOMC: The inflation rate over the longer run is primarily determined by monetary policy, and hence the Committee can specify a longer-run goal for inflation. The Committee reaffirms its judgment that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve’s statutory maximum employment and price stability mandates.

At his first press conference, Warsh confirmed that 2% is the target level, but he did not, and has not, confirmed that PCE prices are the yardstick. In fact, aside from reading out results from the FOMC projections that he chose not to participate in, Warsh has not referred to PCE prices once during his confirmation hearing, first press conference, a central banker panel in Sintra, or two days of congressional testimony. PCE inflation is the yardstick at the Fed. That’s a glaring omission for a Fed Chair, and for a person who likes catchphrases, it’s unlikely to be an oversight.

Warsh’s departure from the Fed’s yardstick goes deeper than a missing data source. In his written testimony this week, Warsh shifted what monetary policy is claimed to determine (compare the blue highlights):

Warsh: While monthly price fluctuations are inevitable—especially in an unsettled world—underlying inflation over longer time horizons is determined largely by monetary policy. The members of our Committee have no tolerance for persistently elevated inflation. And we share a resolute commitment to restoring price stability.

The green highlights in the FOMC quote above are missing from Warsh’s altogether. The FOMC framework discusses the inflation rate, as reported by the Bureau of Economic Analysis, whereas Warsh discusses underlying inflation, a concept for which there is no official estimate. Inflation and underlying inflation are not interchangeable terms.

What is inflation, and what is underlying inflation?

A lesson of the affordability debate in recent years is that much time can be lost arguing past each other if we don’t agree on terms. It’s valid to talk about the overall level of prices, price changes over the past year, and the trend in price changes, but it’s confusing to throw them all into one word: inflation. The stakes are real—there could be a lot of frustration in a few years if we all just ‘misunderstood’ Warsh, and we could end up with some bad monetary policy if he is confused about the goal.

Inflation is the measured change in the prices people actually pay. Underlying inflation is an estimate of where inflation is heading once temporary factors wash out. Core, trimmed mean, and median are all measures of underlying inflation. For the Fed, inflation at 2% is a goal; underlying inflation helps calibrate policy to reach it.

The Fed’s website explains the distinction, first with inflation:

Inflation is the increase in the prices of goods and services over time. Inflation cannot be measured by an increase in the cost of one product or service, or even several products or services. Rather, inflation is a general increase in the overall price level of the goods and services in the economy … The FOMC uses the PCE price index [for its inflation target] largely because it covers a wide range of household spending. [Emphasis added throughout.]

The breadth and representativeness are critical. Price stability is about all prices. That’s why the target is headline inflation, measured by the Personal Consumption Expenditures price index.

A focus on underlying inflation, in contrast, is a means to the end of price stability:

Policymakers examine a variety of "core" inflation measures to help identify inflation trends. The most common type of core inflation measures exclude items that tend to go up and down in price dramatically or often, like food and energy items … Although food and energy make up an important part of the budget for most households—and policymakers ultimately seek to stabilize overall consumer prices—core inflation measures that leave out items with volatile prices can be useful in assessing inflation trends.

When determining the right level of the federal funds rate, Fed officials consider where inflation is likely headed after temporary factors fade. For example, if underlying inflation is above 2%, the Fed might raise rates to bring future inflation to 2%, but if the trend is close to 2%, raising rates would create unnecessary economic weakness. In that case, it might be better to hold rates steady, even if current inflation is elevated.

Price stability is 2% PCE inflation. That’s the goal. PCE inflation is the yardstick for measuring the Fed’s success. Underlying inflation, regardless of its form or source, is a sideshow to that goal — an important one, but a sideshow.

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Confused. Is there a task force for that?

Warsh's testimony before Congress this week included several exchanges that could cause some confusion. I'm not claiming Warsh is confused, but he uses standard terms in nonstandard ways. Three examples.

1. Confusion about what the statistical agencies like the BLS and BEA do.

In promoting his data task force to Senator Scott, Warsh claimed that the CPI and PPI are not good measures of underlying inflation:

Warsh (19:04): In the last couple of days, we've gotten data on the consumer price index — today on the producer price index. Any central bank would be happy to have the data going in the right direction. My view is these are all imperfect measures of the state of underlying inflation. So one of the task forces is going to see whether we can do better—have better data from external sources, and even better ideas as to how important organizations like the Bureau of Labor Statistics, the Bureau of Economic Affairs [sic: it’s the Bureau of Economic Analysis] might think about how they could do a better job in an evolving economy.

Why would they be? The BLS and the BEA do not publish underlying inflation. They publish actual inflation — price changes across a wide range of goods and services — in the CPI, PPI, and PCE. Others can construct measures of underlying trend inflation from these sources or alternative data sets, but the statistical agencies are not in that business. Of course, inflation measurement can be improved, though no one on Warsh’s data task force has experience in that work.

What the BEA does, with input from the BLS, is publish the Fed’s yardstick, PCE inflation. The way Warsh talks about the data task force telling the agencies how to improve runs the risk of asking the referee to shorten the yardstick.

2. Confusion about what would make a good measure of underlying inflation.

It made news at Warsh’s Senate confirmation hearing when he said he preferred trimmed averages, but he clarified to Representative Torres this week that he’s not satisfied with existing versions:

Warsh (2:47:41): So, none of those [like the Dallas trimmed mean] are very good measures of underlying inflation. That Wall Street Journal story that you referenced is incorrect — that I have a preferred measure from one of the reserve banks. If I had a preferred measure, I wouldn’t have called for a task force to go back to first principles, and the data task force will be looking importantly at inflation measures. My view is that we need new measures to understand the underlying changes in inflation. Am I interested in what’s the mean or median price of a good at a big box retailer? You bet I am. And none of these measures capture that. I am super interested in finding new measures to do a better job to help us inform our decisions so that the inflation of the last five years doesn’t continue.

Why would the pricing dynamics of goods at one type of retailer be a good indicator of where PCE inflation—the Fed’s yardstick—is headed after temporary factors fade? Services like health care, housing, travel, and restaurants make up the bulk of spending in the economy, but very little of Walmart’s sales. Also, PCE already includes big-box retailers. A narrower measure of inflation can sometimes help read the trend in overall inflation, but a narrow and unrepresentative one is unlikely to perform well. Again, the Fed’s goal is 2% PCE inflation.

3. Confusion about what inflation is.

These two exchanges with Senators Kennedy and Reed drove it home to me. When Warsh says “inflation,” he does not mean inflation, as in the “change in overall prices.”

Kennedy (1:02:56): Now, well, now we have inflation. Okay. What caused it? In 20 seconds.

Warsh: In 20 seconds—inflation is caused when a one-time change in prices broadens out—

Kennedy: I know what inflation is. Tell me what caused it.

Warsh: Monetary policy, sir.

Kennedy: Okay. Well, I would say what is causing it is AI. The conflict with Iran. Duh. And probably the residual effect of the fact that some imports have become more expensive. Okay? And I think any fair-minded person would conclude that. There was a lot of economists said, oh, the impact of inflation on the rise of the cost of imports would be a one-shot deal …. I don't know. I think it's probably a residual effect. Okay. Is it temporary? Is it permanent? The inflation?

Warsh: It's not going to be permanent under my watch, Senator.

No one could plausibly attribute the 4.1% PCE inflation in May—the most recent reading—solely to monetary policy. I argued in an earlier post that the underlying trend inflation was likely 2.5% to 3%. Assigning the excess of that trend over the 2% target. which is a half a point or so, to monetary policy could be reasonable, but that’s not what Senator Kennedy asked. Kennedy’s own answer with AI, Iran, and imports shows how everyone else hears the word inflation.

The answer to Senator Reed’s question was equally confusing:

Reed (37:00): Recently, Governor Waller and New York Fed President John Williams have warned that AI investments may be increasing inflation, and many economists have similar warnings. So are AI investments current drivers of inflation?

Warsh: This is one of the good family fights. Let me give my own view on it, which might be somewhat nuanced from the way you just described it and some of my colleagues. The supply shock of AI has an effect on demand and supply. We see the effect on demand much more quickly. We see it in the capital investment I referenced. We see it in the prices of chips that are going up. We’re inferring—which is just a fancy word for guessing—when the effects will happen on the supply side of the economy. I don’t view a one-time change in prices as necessarily being inflationary, because I think there’s a supply response. In that way, this is different from a foreign conflict and what it might do, which tends to reduce the supply side of the economy. Will it increase measured prices over the course of the next 12 months? I suspect it will. Whether that’s inflationary or not, that’s up to the Federal Reserve, and we’re going to have something to say about that.

It's not a family fight over whether AI is pushing up inflation. It is clearly in the data. The question is whether that will be temporary. Warsh is tying himself in knots to avoid sounding like Powell's transitory explanations of pandemic or tariff inflation. It also raises the question of whether Warsh accepts that the yardstick is actual inflation.

In closing

Kevin Warsh came to the Fed promising regime change, better communications, and a credible commitment to price stability. Fair enough. Then say the sentence: "The goal is 2% inflation, as measured by the annual change in the PCE price index." Every chair since 2012 has said it, one way or another, over and over. Warsh has committed to the 2% while never once naming the yardstick it's measured with. A commitment that gets lost in translation is not good communication. A chair of catchphrases should understand better than anyone: the words only work if we all attach the same meaning to them.

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On CNBC Wednesday morning, I predicted that the FOMC minutes would be “much shorter and with fewer details.” Steve Liesman pushed back, arguing that the minutes are a committee document. (So is the FOMC statement, and it still got hacked in half, even deleting “maximum employment.”) In the end, the minutes came in about a fifth shorter, so I was right on length, but the substance was preserved. Steve got that right, thankfully. There was as much information as usual on the debate among Fed officials at the meeting.

What’s the plan?

Most importantly, we learned why the Fed held rates steady in June, despite headline inflation twice its target, and what it would take for them to hike this year. Here is the key passage from the FOMC minutes; unpacking it will be today’s focus:

Most participants remarked on scenarios in which inflationary pressures would dissipate and inflation would soon begin to return to 2 percent. In such scenarios, almost all of these participants noted that it would likely be appropriate to maintain or eventually lower the target range for the federal funds rate. Most participants, however, also pointed to scenarios in which, in the context of stable labor market conditions, inflation would remain elevated due to strong AI-related demand, the conflict in the Middle East, or the effects of tariffs. In such scenarios, almost all of these participants indicated that some policy firming would likely be warranted to return inflation to 2 percent.

It’s a dense yet straightforward paragraph:

• Scenario A: Inflation improves soon, then hold rates and maybe eventually cut.

• Scenario B: Sticky inflation and a stable labor market, then some hikes.

Almost everyone agreed on what to do with the federal funds rate in each scenario; they disagreed on which scenario was more likely.

Pictures can help bring these scenarios to life. Here are my illustrations. The minutes speak in words, not numbers, so the specifics—the inflation measure, the size and timing of “some firming”—are my translation of the Fedspeak. First, the inflation conditions in the two scenarios:

My scenarios use core PCE, even though the Fed’s target is total PCE inflation, and the text does not specify the measure. Fed officials will want to avoid being swayed by sharp moves in energy prices stemming from the conflict in the Middle East. The energy wedge is already visible: 4.1% headline versus 3.4% core in May. Core would still capture any broadening of the energy shock. Measures that exclude outliers, such as the trimmed mean, will receive attention, but they performed poorly during the pandemic, and this debate will be settled old-school.

The hike scenario comes with a laundry list of inflationary factors: energy supply disruptions, tariffs, and AI demand. Sticky inflation, regardless of the reason, will lead to firming. The patience the committee showed while tariffs passed through to consumers and earlier, while pandemic-strained supply chains healed, has worn thin. Core inflation improves soon, or there will be hikes. Expect less storytelling on the components as a reason to wait.

Soon is the most important detail in the hold scenario; without it, the scenario would sound very much like Team Transitory 2.0. Soon is not well-defined, but it does suggest that the core inflation data in the coming months need to improve. In June, Fed officials voted unanimously to hold, though a few argued for a hike in the meeting. Those few could act as soon as the July meeting, but the September or October meeting is a more likely deadline for the majority. That is not far away.

The hike scenario is about more than inflation. The qualifier "in the context of stable labor market conditions" is important. At its June meeting, the Fed sent a clear signal that it will deliver price stability. That was not a denial of its maximum employment mandate. It was a recognition that, with the unemployment rate stable in the low 4s and job growth up from last year, the problem now is inflation. If the labor market becomes a problem, the hike scenario is not so simple.

The scenarios suggest two different paths for rates this year.

The hike scenario calls for “some firming,” which I interpret loosely as 25-basis-point increases in September and December. The “some” is an important qualifier, indicating a modest increase in total rather than a full-blown tightening cycle. The current level of the funds rate is close to neutral, so even a half-percentage-point increase could add some restriction. Coming out of the pandemic, with rates near zero, the Fed had to cover a lot of ground with hikes to create any restriction. Some firming would be the Fed ensuring that current inflation excesses are temporary.

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What’s more likely?

That’s largely a question about what’s more likely to happen with inflation and employment in the coming months, and then a bit about building a majority around one interpretation on the FOMC. For this year, I would put a 60% chance on the hold scenario and a 40% chance on the hike scenario. In favor of the no-hike case: Recent months have seen less tariff pass-through into inflation, housing disinflation is ongoing, the effects of energy shocks on core tend to be modest, and the labor market shows no signs of overheating. In favor of a hike: supply shocks and shortages often take longer than you expect to work out. Plus, the arithmetic for getting core under 3% soon is demanding: to get there by December, monthly prints need to average 0.18%, versus about 0.29% over the past three months.

Fed officials are even closer to a coin flip than I am. The dot plot showed that nine officials judged that one or more rate hikes would be appropriate this year, eight favored holding rates, and one favored a cut. The Chair did not submit a dot. Note the timing: the dots came out right as the US and Iran signed their memorandum in June, so any relief on energy prices isn't in them yet. The two scenarios also help us interpret the dot plot. Fed officials were divided in their outlook for inflation, not in how to react to inflation.

What I like about the scenarios is that the Fed is not keeping the financial markets guessing. They are fairly straightforward, and they explain what the Fed is looking for. We can all watch the economic data—CPI, PPI, and import prices for June—this week and continue to update the likely path for the federal funds rate.

In closing.

We had to wait three weeks, but the FOMC minutes really delivered. The two scenarios do not cover all possible outcomes, but they indicate what Fed officials are most concerned about and how they would respond. The rest is up to the data, and the data-driven Fed is alive and well. Knowing something about the Fed's reaction function is more useful than knowing where they guess the funds rate will end up. Guesses go stale a lot faster than contingency plans.

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This post was meant to be a deep dive into the inflation data. Mostly, it still is. But this morning, the Supreme Court ruled in Lisa Cook's favor, blocking her removal from the Fed over unproven allegations. So monetary policy stays guided by data, like inflation, employment, and in the hands of the Fed, not the President. The same day's events also underscore why the Fed must explain what it's doing, and why. Three threads, then: independence, inflation, and communication — who decides, where inflation is headed, and what the Fed owes the rest of us.

Interest rates: Who decides?

At its heart, Fed independence is about who decides interest rates. Is it the technocrats at the Fed or politicians like the President? Today’s 5-4 Supreme Court ruling in Trump v. Cook was a win for interest rates set by economics, not politics, since it upheld the job protections for Fed officials. The narrow question was whether the President could remove Fed Governor Lisa Cook — fired over an allegation of mortgage fraud for which she has never been indicted, let alone convicted — while her challenge plays out in the lower courts. Chief Justice Roberts, writing for the majority, said no, explaining,

[Accepting the government’s position] would in effect transform the Federal Reserve’s for-cause protection into at-will employment—an interpretive leap out of step with the statute Congress enacted and our Nation’s tradition of central banking protected from political interference.

The White House asserted that the President’s decision for cause was unreviewable by courts. A decision in favor of the President would have allowed the White House to remove any member of the Board and pack the Fed with loyalists. The Supreme Court has shut down what would have been the President’s fastest path to getting control of interest rates. But it’s not over. They did not decide whether Trump had cause to fire Cook; that fight now returns to the lower courts.

It was uncomfortably close at 5-4. And in a companion case, Trump v. Slaughter, the Court handed the President at-will control over other independent agencies that had previously enjoyed job protections, such as the FTC. The Fed was the only carve-out.

Cook’s own words today capture the meaning of the ruling well:

This was never about mortgage documents signed years before I became a Federal Reserve governor. It was an attempt to remove me on a manufactured pretext because I refused to bow to political pressure and continued to set interest rates based only on what would best serve the American people. That is the most fundamental obligation of a Federal Reserve governor. Today’s ruling affirms a principle that has underpinned sound economic stewardship for generations: that the Federal Reserve must make all its policy decisions guided by evidence and independent judgment, free from political interference.

When Lisa Cook was nominated to serve at the Fed in 2022, I summed up the many ways she would contribute to policy: “The duties of the Board are many, and Cook will be the strongest all-around member.” I could not have been more correct. Cook will stand tall among the few who have defended the Fed’s independence. And with that defense, we can keep our attention squarely focused on the economy.

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Inflation: Where’s it headed?

When talking about inflation, Kevin Warsh says “underlying pace,” Austan Goolsbee says “throughline,” and John Williams says “glide path.” Different words, same idea: where is inflation headed, on its own, if there aren’t any new developments or any changes in monetary policy?

Can we be confident inflation is headed to 2%? No, we cannot. Underlying or trend inflation is more likely to be between 2.5% and 3%. That’s good news relative to the current 4.1% pace, but it overshoots the 2% the Fed said it would deliver. That doesn’t mean that 2% inflation is out of reach; it just means either economic conditions will have to shift toward disinflation or the Fed will need to raise rates.

Getting from 4.1% down to that 2.5–3% trend doesn't take much; several one-off pressures are already unwinding. PCE inflation was 4.1% in May, more than twice the Fed’s target, but it's not a good read on where inflation is headed. The increase in energy prices from February to May due to the conflict in the Middle East added nearly a percentage point to inflation. Progress in June on reopening the Strait of Hormuz has already led to declining energy prices. While it will still take several months for energy prices to fully normalize, the move is already underway without any action from the Fed. In addition, there are clear signs in recent months that the pass-through of tariffs to goods prices is mostly complete, and core goods inflation has just started to cool (orange line below). A return to the pre-tariffs pace for core goods would subtract more than 1/2 percentage point from overall inflation. Reversing the effects of energy and tariffs on inflation alone could bring inflation back to 2.5%.

Rather than relying on stories about specific components, statistical approaches can identify the persistent part of inflation. A common assumption is that outliers—very large increases or very large decreases in prices—tend to be one-offs or temporary. Outliers can distort simple averages like headline inflation. Likewise, core inflation, which excludes food and energy, can still be distorted by outliers that are not food or energy. Median inflation, the middle of the price distribution, and trimmed-mean inflation, which excludes the highest and lowest price changes, are alternatives. The PCE trimmed mean from the Dallas Fed removes the bottom 24% and the top 31% of the distribution, so it can be sensitive to shifts between positive and negative outliers. The skew-adjusted trimmed mean developed at the Cleveland Fed corrects for that. Taken together, these alternative measures (especially after the skew adjustment) are consistent with a 2.5%-3% trend.

What's left? Non-housing core services account for that last half percentage point of trend inflation above 2%. Like overall PCE inflation, the excess here is mixed in how likely it is to persist. Within transportation, higher airfares — driven by the recent surge in jet fuel prices — are likely temporary. In financial services, the big mover is portfolio-management fees — charged as a percentage of assets, so a rising stock market mechanically shows up as inflation. An upcoming BEA change will base these prices on the service provided rather than the market, likely revising current inflation down. The rest of the excess in non-housing core services is stickier — health care, for example, which is full of administered prices. And across many labor-intensive services — recreation, hotels, restaurants, and other personal services — inflation has stayed persistently above its pre-pandemic pace. One might argue this is the "cost" of the soft landing.

A good read on where inflation is headed is critical to whether the Fed needs to move rates. But trend is not destiny — even a 2% trend is no guarantee of price stability, since actual inflation can diverge from trend as it does now.

Communication: What’s the goal?

The Supreme Court sees the Fed as special in its independence from political control, and at a moment when inflation is one of voters' top concerns. Monetary policy won't be made by politicians, but it will have political consequences and shape the lives of millions. That's a lot of power to entrust to Fed officials.

To keep that trust and maintain independence, the Fed's guiding principle in communication should be transparency in service of accountability. The Fed cannot guarantee that unemployment and inflation will be low, but it can guarantee it will pursue those goals diligently and show its work. Hiding behind jargon or staying quiet won't deliver.

Last week on Bloomberg, I was asked a question that stuck with me:

Ferro: “You have been inside the Fed and watching the Fed. If you had free rein of the institution and could readjust — adjust the communication apparatus at the Federal Reserve — what would you change? What would you get rid of?”

I fumbled a bit — 6:45 am, no coffee — but the themes came through:

Sahm: “Goodness. In the time I was at the Fed — I started in 2007 — I watched a Fed become more transparent, more speaking to the public. I think it is very important for accountability’s sake that the public, the Congress understands what the Fed is doing, why they are doing it. Sometimes it will be clear they made a mistake. Sometimes if you show your work it will be clear you made a mistake. I think the accountability piece is important. The fine-tuning of how the Fed gives information so markets can understand it and help the Fed do its job — part of how it works is through financial markets — there is a lot of fine-tuning. The dot plot is not a perfect tool in any form, but the spirit has real merit… I worry that it is very easy to delete things, delete tools. But that doesn’t necessarily move the ball forward in terms of improving the goal-setting, improving the transparency.”

Once you have the principle right, then the tinkering on the apparatus can be more targeted. My long-standing concern with the dot plot is that it’s hard for people to understand. I have a PhD in economics, listen to almost all the Fedspeak, and I still have to make guesses with the dot plot. I can list my preferred tweaks, but honestly, that's a sideshow to getting the Fed to elevate transparency and accountability. Members of Congress and regular people are just as important as financial market participants.

Communication is not primarily about keeping financial markets informed on monetary policy. It’s about keeping monetary policy in the hands of Fed officials. The Fed is special, and it needs to act like it.

In closing.

The Court preserved the Fed's independence, which deepens the stakes for getting monetary policy right and being accountable to the public. Fed officials setting rates answer to the evidence, not the President, so reading the data right is critical. That evidence points to trend inflation somewhat above 2%, an overshoot that might necessitate higher interest rates, or it might not. In either case, it’s important for the Fed to lay out its thinking. Transparency and openness to feedback can’t substitute for good economic outcomes, but they should be part of the pursuit. That’s how the Fed can help protect its independence and keep monetary policy driven by economics.

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Last week, Kevin Warsh did his best to stay behind the curtain and deliver on his promise of a quieter Fed. The FOMC statement was cut by more than half, to 130 words; Warsh did not participate in the Summary of Economic Projections, which includes the dot plot, and at the press conference, he refused to elaborate on monetary policy or inflation beyond what was in the statement. Warsh defended his guarded stance on information grounds. Market prices, he argued, are the most important signal the Fed has, but when markets are only "reflecting back what we've said," the Fed loses that signal, he claims. Quieter Fed communication, in his telling, lets the Fed hear a louder market signal. Warsh is flipping the direction of information from “forward guidance,” in which the Fed offers insights on future policy to affect markets today. The best way to exchange information with financial markets is debatable, but that exchange is only one aspect of Fed communication. Accountability and transparency to the public are, too. Even if we focus on the first channel, markets can’t make Warsh talk, but Warsh can’t make them ignore the Fed either. So, who or what will fill in the blanks?

The dot plot.

The short FOMC statement ended with a forceful commitment: “The Committee will deliver price stability.” The next natural question is, what’s the Fed’s plan to deliver on price stability? Warsh was determined not to discuss the path ahead, so the dot plot filled the gap, a dot plot that Warsh did not participate in. The dot plot drawn anonymously from the eighteen other Fed officials is the first candidate for the shadow Fed Chair.

As I predicted in last week’s post, the dot plot showed Fed officials deeply divided over the best course of action for monetary policy this year. Nine officials said it would likely be appropriate to raise rates, eight favored holding rates, and only one favored a cut. Yet the committee voted unanimously to hold rates steady — unanimous on its current decision, deeply divided on where rates should go from here. The dot plot, with no help from Warsh, signaled a dramatic shift: many more Fed officials now see appreciably higher rates as appropriate than did in March, reflecting an inflation outlook that has worsened in recent months. Their previous dots were from the initial weeks of the conflict in the Middle East, and a lot has changed since then.

Financial markets reacted to the hawkish dot plot, pushing market rates higher. Even so, the dots are a poor shadow Fed Chair. Start with the obvious: the June median is not the FOMC's median; it's the FOMC median minus the Chair. That’s a big minus March's dot plot didn't have. And even a complete plot would be a thin proxy. It's an individual exercise done in preparation for the meeting, not a read on where the committee landed after it. And the committee updates it only every other meeting, so it offers nothing at all in July.

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Other Fed officials.

Since Warsh won’t talk, the search will be on for a Fed official willing to speak and seeming to embody the committee’s consensus. I am not fond of this exercise. I would much prefer Warsh, as the actual Chair, lay out the committee’s thinking himself, but that’s his choice, not mine.

Warsh cannot force other Fed officials to stop talking. Out of deference to the new Chair, I expect fewer explicit discussions of future policy. But most will still explain why they voted as they did and how they think about the path ahead. That would be a lot more than Warsh appears willing to do.

The search for a shadow Fed Chair starts this week. Fed Governor Chris Waller, who was on the short list for Fed Chair, speaks Monday morning at a conference on the dollar. New York Fed President John Williams and Chicago Fed President Austan Goolsbee speak later in the week. Reading the Fed will now mean listening to every official and stitching their comments together over time, a noisier and less precise process than we are used to with recent Fed Chairs. Critically, Fed officials are only allowed to speak for themselves and cannot reveal the committee's conversations. The Fed Chair is the only one authorized to speak for the FOMC, and Warsh is choosing not to. No other Fed official will speak for the Chair. The Chair is the missing piece. He sets the agenda for the meetings, so his silence is the hardest gap to fill in reading where the committee lands.

Other Fed officials treated as the shadow Fed Chair might fill in some of the blanks, but as Powell said in his last press conference, "There is only ever one Chair of the Federal Reserve Board." That one Chair is now Warsh, and he is the one staying silent. We might identify a stand-in, but he or she will be an imperfect substitute for the only person authorized to speak for the committee.

Shadows.

The worst possible outcome is that the shadow Fed Chair is the shadows. Private exchanges are not new at the Fed, and the line between proper and improper has always been hard to draw. But when the Fed says much less in public, that scarcity makes any private word with an official far more valuable, and the gray area more dangerous. If Warsh is serious about cutting back the Fed's public communication, he will have to be even more aggressive about reining in its private communication.

Over the weekend, the Wall Street Journal reported that Michelle Bowman, the Fed's Vice Chair for Supervision, spoke at an invite-only private dinner hosted by Bank of America for clients just hours after Warsh's press conference. Bowman said the reporting "unfairly characterizes" the event and that she followed the Fed's ethics rules. She may well have. But if the Fed says less in public, a private word, or even a facial expression, from an official is worth more. So the Fed's ethics rules on private communication will need to be tightened to match Warsh's vision for a quieter Fed.

The pursuit of prestige and profit through private access to Fed officials is not new. Years ago, interviewing for a financial-sector job, I was asked whether I could get current Fed officials to appear at the firm's private events. I said no, and that I did not think anyone could, given the ethics rules. It cost me the offer, and losing it taught me how much private access is worth. I was also wrong that no one could. These arrangements turned out to be more common than I assumed, which is why Bowman's dinner did not surprise me. It is not the first to draw scrutiny in recent years, and it won't be the last. The stakes for private gain will ratchet up enormously if the Fed under Warsh pulls back on its public communication. Less public sunlight means more business done in the dark.

In closing.

So who, or what, will be the shadow Fed Chair? The honest answer is no one, and nothing. The dots, the other officials, even the private events can fill in some missing information, but each is a noisier, less reliable substitute, and none can do the one thing only the Fed Chair can: speak for the committee and answer for its decisions. That gap comes at a price. A muddier signal raises the odds that the Fed will surprise markets and that adds to borrowing costs. And it leaves the public with a looser claim on an institution that owes it both accountability and transparency. One of Warsh's five new task forces is on communication. Forward guidance is too narrow a lens. It should also ask what the public deserves to know about the Fed's thinking, and how the Fed keeps access to that thinking from becoming a private privilege.

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Bonus Links (recorded last Thursday after the FOMC meeting):

• On Bloomberg TV, I argued that, whatever one thinks of skipping the dot plot, Warsh should at least have explained the Fed's decision to hold. Accountability starts there. (Video on X).

• I joined Randy Quarles, a former Vice Chair for Supervision, and Mark Sobel, the Chairman of the Official Monetary and Financial Institutions Forum, for an OMFIF webinar. It’s a good sampling of differing viewpoints on the Warsh Fed.

• Finally, I was on the Moody’s Inside Economics podcast with Mark Zandi, Marisa DiNatale, and Cristian deRitis. We talked about many aspects of the Warsh Fed. Mark even made a prescient observation that private communications could be a problem for a Fed that talks less in public.

All eyes will be on Kevin Warsh this week as he chairs his first FOMC meeting. However, with PCE inflation on track to top 4% in May, the more pressing question is whether the Fed should raise rates this year. The debate around the FOMC table will be critical, and I worry that Warsh’s efforts to rein in forward guidance could bury it. Obscure a hawkish shift now, and markets get an unwelcome surprise if the Fed actually moves. The uncertainty itself could add to borrowing costs.

To hike or not to hike.

Inflation, not the labor market, is the problem that the Fed faces. In some ways, that’s an improvement from last year when both sides of its dual mandate appeared at risk. The good news of a stabilizing labor market in recent months has been overshadowed by a sharp pickup in inflation. The new inflation largely stems from an energy supply shock due to conflict in the Middle East, but it is layered on top of an overshoot of more than five years.

The standard approach is for the Fed to ‘look through’ the energy supply shock and not hike. Raising interest rates would not solve the supply constraints pushing up prices, and it would reduce the well-being of families, whose purchasing power is already being squeezed by higher energy prices. That basic logic applies to any supply shock, including tariffs or pandemic-era snarled supply chains.

The standard approach is only a starting point in the policy deliberation. Inflation that starts with a supply shock may still prompt the Fed to hike rates. A rate increase could be appropriate if the initial price increase triggers a feedback loop of further price increases. My last post on the breadth of inflation was motivated by that outcome. Of course, waiting until inflation has clearly spread risks moving too late, so the Fed monitors conditions that might raise the likelihood, such as an overheating labor market, excess demand in general, and an increase in longer-term inflation expectations. So far, none of these common triggers for hiking into a supply shock are flashing red; that cautions against a hike.

What normally settles the debate may not be sufficient now. There is an additional argument in favor of a hike that is gaining traction on the committee: duration. With inflation above 2% for more than five years, there are rising concerns about inaction. It might be appropriate to look through each supply shock on its own, but a whole series of shocks that keep inflation elevated for years may require a rate increase. At a recent event on the legacy of the Powell Fed, Christy and David Romer, two experts on monetary policy, made this argument:

… faced with a shock whose impact on the price level is likely to play out over an extended period, but whose effect on inflation is likely to ultimately be transitory if inflation expectations remain stable, policymakers should focus less on inflation expectations and more on the inflation itself, and so be more willing to respond. This could temper the inflation, and so reduce its harms. And more speculatively, by showing policymakers’ concern, it might at least marginally reduce the anger caused by the inflation.

Cleveland Fed President Beth Hammack has applied similar logic on duration to argue that rate hikes might be appropriate this year. It is worth noting that Janet Yellen, in concluding remarks at the event, disputed the Romers’ conclusion and argued for the standard approach to supply shocks. There will almost certainly be a robust debate around the FOMC table—a debate about which data to use, and a debate about what the data show.

Following the standard approach to supply shocks, I would argue for the Fed to hold, not hike, this week, and I expect the majority of Fed officials will agree. However, the question of duration is a hard one. After five years of elevated inflation and deep frustration over higher prices, it might seem like the easy answer is for the Fed to hike to get inflation down. But a hike does not fix the energy shortage. It reduces demand by squeezing the same families already under pressure from higher prices, and for most of them, the cost is not a lost job but the raise that never comes. Would people be better off if the Fed were more aggressive this time, or just poorer in a way that is harder to see? It’s a tough call. There’s a good reason the FOMC is divided.

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A diversity of views.

The debate at this week’s FOMC meeting will largely play out behind closed doors, though the Summary of Economic Projections (SEP)—which includes the dot plot—released on Wednesday will offer clues on Fed officials’ thinking.

In the SEP, each official provides their forecasts for inflation, the unemployment rate, real GDP growth, and the federal funds rate for 2026, 2027, 2028, and the Longer Run. It's a special kind of forecast: most forecasts take the federal funds rate as given and predict the economy, but the SEP runs the other way—each official chooses what they believe monetary policy should be and reports the economy that follows. It's a bit like letting each official be the FOMC. Median inflation in the SEP almost always returns to the 2% target within about three years. There's a reason. If an official expected inflation to be persistently above 2%, normally they would revise their appropriate federal funds path upward until inflation is expected to reach the target. So an official who projects inflation to remain above 2% at the end of the forecast horizon is telling you something specific: they view the costs of an inflation overshoot as less than the costs of the higher rates required to end it. A supply-driven overshoot could create such a gap, and that will come down to the official’s value judgment.

What I find most useful in the SEP is what it reveals about the officials' value judgments or, in Fed jargon, their individual reaction functions. When it added the rate projections, the Fed first sought to create a consensus forecast within the FOMC—one path for the federal funds rate, not 19 separate ones—but they were unable to reach an agreement. Because each official submits their own path, the SEP is not the best source of forecasting what the FOMC is most likely to do. The median dot is often misread as the Fed's most likely path for rates. It isn't—it's just the middle of 19 individual judgments, not a number the committee agreed on. The SEP maps the range of viewpoints entering a meeting, not the policy likely to come out of it.

The viewpoints from Fed officials reflected in the SEP are a window into the debates around the FOMC table. This week’s SEP is likely to show division and an increasing number of officials who view a rate increase from the current range of 3-1/2 to 3-3/4 percent as appropriate this year.

The Survey of Former Fed Officials and Staff (SOFFOS), led by Jon Hilsenrath, clearly shows the shift. In the June survey (green dots below), 17 former Fed respondents said a hike would be appropriate this year, versus 14 in favor of no change and only 1 in favor of a cut. The magnitude of the hawkish tilt is notable, too: most of those favoring a hike put it at 50 basis points or more. In contrast, in the actual March SEP (blue dots below), most Fed officials thought that cuts would be appropriate this year.

The survey of former Fed officials and staff is likely more hawkish than the SEP from current officials will be this week, but it shows where the hawkish edge lies—and how much pressure the standard approach of looking through supply shocks is under. Markets have already priced in a rate hike this year, on the back of worse inflation and better labor market data, so a hawkish lean from the Fed would not be a complete surprise. But markets pricing an eventual hike is different from the Fed itself signaling one. If the median dot showed a hike as the appropriate path, it would mean that the central tendency among Fed officials has shifted from a watchful hold to preparing for a rate hike. That would be the surprise.

Keeping the signal.

The debate at the Fed over how to respond to inflation is heating up, and the SEP will be one way to measure it. But the SEP itself is in the crosshairs. The new Fed Chair, Kevin Warsh, has been skeptical of the dot plot for years, as well as of any forward guidance in which the Fed discusses future policy decisions. He worries that publishing forecasts, even individual ones, pushes officials toward a common view, stifles genuine disagreement on the committee, and creates a bias against reacting to changing circumstances. The SEP has its flaws, but Warsh's concerns strike at the core of the exercise.

Given his concerns, it would be no surprise if Warsh decided not to participate in the June SEP and withheld his forecasts. Other Fed officials might also withhold their forecasts in support. A SEP without the Chair would get much less attention, but it would also mask the range of views on the committee.

Neutralizing the SEP this week might address some of Warsh's concerns, but it would almost certainly create new ones. With inflation rising and the committee visibly split, drawing attention away from the dots risks looking like an effort to hide the hawkish shift. A Fed that appears to be concealing its own debate could look complacent about inflation, which is exactly the credibility it can't afford to lose. Letting the debate show, even alongside a near-certain hold, is what signals the Fed is awake to the problem.

A more constructive approach than withholding his dots would be for Warsh to participate in the SEP and clarify in the press conference that it reflects an individual's views at a point in time, not a commitment to act in the future. Warsh could reiterate his concerns and commit to either improving the SEP or winding it down, with the committee’s backing.

Warsh himself said he wants a “good family fight” on monetary policy around the FOMC table. Whatever its shortcomings, the dot plot has been a key tool of the Fed family. Improve it, don’t undermine it—especially when the call is this tough and the committee this divided.

In closing.

It’s not about the dot plot or the new Chair. It’s about getting monetary policy right. Markets do not need the Fed to telegraph its next move—the world is changing too fast for explicit forward guidance to make sense. Instead, they need to see how the committee is weighing a genuinely hard call. A hold, paired with signs of a robust debate, shows that the Fed sees the inflation problem and is carefully crafting its response. A hold that hides the debate conveys far less, and forces markets to fill the silence with guesses. That uncertainty is not free—it shows up in borrowing costs. At a time when the best approach to inflation is unclear, the most reassuring thing the Fed can do is show us the range of its thinking.

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During the past twelve months, PCE prices have risen 3.8% (dark blue line), and over the past six months, that pace has accelerated to 4.8% at an annual rate (light blue line). Headline inflation is running well above the Fed’s 2% target, and the momentum is pushing inflation rapidly away from target. A critical question is whether the current pickup resembles the early stages of pandemic-era inflation or simply the unfortunate layering of multiple one-off price increases due to tariffs and higher energy prices.

Looking Under the Headline

Average inflation—the headline number reported—is elevated, but the distribution of price changes suggests that the problem is relatively narrow. Behind aggregate PCE inflation are prices for 177 categories of goods and services. The categories vary in their share of total expenditure. For example, gasoline is 2% of total consumer expenditure, dining out is 5%, and owner-occupied housing is 11%. Putting that information together, we can then ask the following questions: What share of consumer spending saw prices fall? What share saw prices rise 5% or more? And then sort everything in between into buckets. The charts below do this using the annualized six-month change to capture the recent acceleration. The period from 1995 to 2005, when inflation averaged close to the 2% target, serves as a benchmark.

PCE inflation is elevated for two main reasons: 1) there are too few categories with price declines (top panel), and 2) there are too many categories with 5% or more price increases (bottom panel). Other parts of the distribution have mostly normalized since the pandemic surge, though the typical category still runs a bit above its pre-pandemic pace. The shortfall at the bottom began to open in early 2025, while the excess at the top is a more recent phenomenon.

Core goods and non-housing core services are critical to explaining the top and bottom of the distribution relative to the 2%-consistent benchmark. The current composition of price changes at 5% or more shows that two-thirds of the excess contribution comes from non-housing core services (blue bars) and one-third is from core goods (red bars). Energy is a rising contributor in the top inflation bucket, driven by the surge in gasoline prices since the start of the Middle East conflict, but it remains close to the benchmark contribution to energy. In the pandemic, the inflation surge began with a similar composition, but housing inflation was a key and lasting contributor to the excess. Housing is no longer contributing to the top bucket of inflation.

The role of core goods in explaining the lack of declining prices is clear. During the pandemic, there was substantially less deflation in core goods than usual. Protracted supply chain disruptions led to sizeable increases in goods prices. The anomaly had largely resolved by late 2024, but then it reopened to a magnitude similar to that of the pandemic. The pattern at both the top and the bottom of the distribution has clear signs of tariffs. The large increase in tariff rates in 2025 has filtered through to goods prices. While the assumption is that these are one-time adjustments to price levels, the adjustment process has stretched over several months. The timing of price increases has varied across categories, too.

Looking at the recent change in prices of specific core goods compared with six months ago reinforces the role of tariffs. Several items in women’s and girls’ clothing, footwear, and luggage have experienced significant price increases over the past six months and are highly exposed to tariffs. Price changes have slowed dramatically for other core goods that had risen earlier, such as furniture and major household appliances. These are consistent with the passthrough being largely complete and with a return to disinflation. Tariffs are not the only driver of core goods. Sharply higher prices for computer software and consumer electronics likely reflect strong AI-related demand and semiconductor shortages.

The rising contribution of non-housing services to the top inflation bucket also highlights how higher energy prices bleed into core inflation. Over the past six months, price increases in several energy-intensive service categories such as airfares, transit, and taxis have accelerated sharply. Oil prices surged in early March, so these data through April only capture the initial adjustment to the energy price shock. Moreover, most of the outsized increases in this category, like hotels, health insurance, and domestic services, are likely unrelated to the conflict in the Middle East.

In Closing

Looking at the full distribution of inflation, in line with Warsh’s comments, offers a less alarming perspective on the current direction of inflation than the headline numbers. Elevated inflation now is about unusual patterns in the tails, not the broad-based heat. Of course, the distribution cannot tell us whether supply shocks like tariffs or energy disruptions will lead to one-off price increases or spill over into a series of price increases, as they did during the pandemic. That will require ongoing monitoring of the data to determine.

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Bonus Links and a Chart

Excellent explainers of the trimmed mean and why one should be careful with it now:

• “Skewness warrants caution as Trimmed Mean PCE inflation eases.” by Tyler Atkinson, Jim Dolmas, and Rebecca Zarutskie at the Dallas Fed.

• “So You Want to Talk About Trimmed Mean Inflation?” Vikas Patel and Skanda Amarnath at Employ America

Deep dives into the effect of tariffs on inflation. Multiple approaches to the question suggest that tariffs have pushed up consumer prices.

• “Detecting Tariff Effects on Consumer Prices in Real Time – Part II” by Robert Minton, Madeleine Ray, and Mariano Somale at the Federal Reserve Board.

• “Tracking the Short-Run Price Impact of U.S. Tariffs” by Alberto Cavallo, Paola Llamas, and Franco M. Vazquez at Harvard.

The distribution chart from 1960 to the present includes earlier periods of inflation.

People who expect gasoline prices to fall again soon and generally feel good about the year ahead might use savings to cover the temporary extra cost. People who expect higher gas prices to drag on and spill over into other prices, persistently reducing their disposable income, or expect a sluggish economy, might pull back on their spending. They might also try to find higher wages to offset higher inflation, pushing even more costs into the economy. Monitoring sentiment and expectations now can offer insights into what consumer spending, inflation, and the labor market might look like later this year.

It’s not surprising that there’s a lot of interest from policymakers and forecasters in what measures of consumer sentiment and inflation expectations are telling us today. With recent headlines like “consumer sentiment hits fresh record low in May” and “inflation expectations are rising,” there’s real concern. But there’s also a debate about whether some of the longstanding measures, like those from the Michigan Survey, no longer tell us anything about the views that shape people's economic decisions. That's the claim worth taking seriously, because if it's right, the record-low sentiment readings and the pickup in long-run inflation expectations are noise; and if it's wrong, they're a warning.

Is it politics or is it reality?

Kevin Hassett, a top economic advisor at the White House, recently brushed off downbeat consumer sentiment as pure politics:

They call it consumer sentiment, but I don’t think these words mean what they think they mean anymore. We looked at the political affiliation of the people who are responding. At the peak of Biden’s stagflation, with inflation running out of control, Democrats in the survey had a sentiment index way above 100. Now they are at 30 something. And then Republicans have stayed relatively steady throughout. But we find basically we find that the consumer sentiment indicator at the University of Michigan is just a political survey. In fact, the correlation between what Independents say and Democrats say is like 0.8 or 0.9. It’s almost perfectly correlated. They have somehow devised a political survey that tells us how Democrats are feeling about things.

Paul Krugman pushed back, using another survey to argue that MAGA Republicans, not Democrats, are the outlier on sentiment:

The great majority of Americans — essentially everyone who isn’t a total Trump loyalist — believes that the economy is getting worse. And there are good reasons for that negativity. Inflation is way up as a result of Trump’s tariffs and his Iran war. Because of this surge in prices, real personal income has declined sharply.

Krugman captures the fundamentals driving sentiment this year well. Hassett undercuts his own ‘Democrats-only’ argument by mischaracterizing the recent swings in sentiment, as I will show below. Widening the lens on the Michigan Survey—a longer history, a closer look at political affiliation—I find that pessimism has deepened regardless of party, but the partisan divide has grown so large, and the survey itself has changed in ways I’ll get to, that the numbers have become harder to interpret.

The Michigan Survey is about economics, not politics.

The Michigan Survey has always sought to capture consumer attitudes that might shape economic behavior. The survey was launched after World War II to gauge how people might respond to the economy’s reopening and the large holdings of government war bonds. The intent is clear in the sentiment index questions themselves:

1. We are interested in how people are getting along financially these days. Would you say that you (and your family living there) are better off or worse off financially than you were a year ago?

2. Now looking ahead—do you think that a year from now you (and your family living there) will be better off financially, or worse off, or just about the same as now?

3. Now turning to business conditions in the country as a whole—do you think that during the next twelve months we'll have good times financially, or bad times, or what?

4. Looking ahead, which would you say is more likely—that in the country as a whole we'll have continuous good times during the next five years or so, or that we will have periods of widespread unemployment or depression, or what?

5. About the big things people buy for their homes—such as furniture, a refrigerator, stove, television, and things like that. Generally speaking, do you think now is a good or bad time for people to buy major household items?

These questions are a mix of family-specific and economy-wide assessments, as well as current and expected conditions. They have proved valuable in studying changes in the economy. For example, Bryson and Blanchflower have shown that the index built from these questions has been a reliable predictor of recessions in the US, and similar measures are also informative in other countries. In my time as a consumption forecaster at the Fed, I found them a useful addition to the toolkit, particularly around turning points in the economy.

While the questions are economic in nature, it’s not hard to see how a person’s political views might affect the answers. Political affiliation, when asked, is placed at the end of the survey to avoid priming people to think about their politics. Even without prompting, the political divide in consumer sentiment is striking.

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Having your party in the White House has a large effect on sentiment, but people are more downbeat regardless.

The partisan divide in sentiment is huge and clearly tied to whether your party is in the White House. The average sentiment among Republicans (red line below) in the past three months was 55 index points above that of Democrats (blue line). To put that in context, the sentiment gap between households in the top third of income and those in the bottom third is only 13 points. No other demographic grouping in the survey comes anywhere close to the political divide. Also, the re-ordering in sentiment—among both Republicans and Democrats—when the President’s party changes is clear. That’s consistent with a well-documented phenomenon in which people tend to overestimate the President’s effect on the economy. Contrary to Hassett, Republicans are no more stable in their views across administrations than Democrats.

The strong political cycle in sentiment does not mean that the Michigan survey is pure politics and divorced from consumer behavior. Economic drivers are still clearly at play, too. Looking at the sentiment of Republicans and Democrats separately, it is clear that both have declined since the start of the year as gasoline prices have risen sharply. Other major economic events, such as the inflation surge in 2021-22 and the onset of the pandemic in early 2020, show up as a decline in sentiment regardless of political affiliation. Contrary to Hassett, sentiment among Democrats fell well below 100 when inflation surged in 2021-2022. All of those fit the standard economic narratives of consumer sentiment.

The downbeat mood of people in recent years, sometimes referred to as a vibecession, is also apparent. The average sentiment of Republicans is currently below their pandemic low in 2020. Among Democrats, the downshift relative to 2020 is more pronounced, but sentiment among Republicans is noticeably lower than during most of Trump’s first term. Writing off the low sentiment readings now as 'Democrats are unhappy with Trump' is throwing away a lot of information.

The political divide has more than doubled since the Great Recession, making sentiment harder to compare.

Prior to 2017, the Michigan Survey only asked about political affiliation sporadically, usually around elections. The earlier estimates are somewhat noisier, but the widening partisan gap is stark. In the spring of 2008, the gap was less than 20 index points, compared with 55 points in 2026. Under Obama, the partisan gap widened somewhat, but it was not until the Trump administration that it almost doubled.

The widening political divide raises hard questions. Good decision-making depends on having good information about the world. One way to interpret these very different sentiment readings is that the two sides are drawing on genuinely different information — living in alternate universes. (Nothing in the survey primes people toward party loyalty, so the gap isn't a survey artifact.) Another is that Trump's communication style has elevated the "the President runs the economy" mindset. I am well aware of the tendency to over-emphasize the President, and I have to actively guard against it as I sift through the latest barrage of posts on Truth Social.

The widening divide also complicates comparisons over many years, such as how to think about an all-time low in the series now. In 2008 and 2009, during the Great Recession, consumer sentiment was very low. The overall index ranged from the low 50s to the low 60s. It was low for both Republicans and Democrats. Now the overall index is in the 40s, but that reflects Republicans with much higher sentiment and Democrats with much lower sentiment than the average. If the economic reality were the worst of all time, how could partisanship have such a strong effect?

I also worry that economic views tied to politics, rather than economic reality, could lead to bad decisions and frustration for people. Consumer sentiment may be getting harder to use in forecasts of consumer spending, but it may be forecasting something even more important about society.

The usual workarounds don't fix it.

Given how large the partisan divides are, there is no easy fix. One common go-to is to examine the sentiment of Independents. It's true that Independents' sentiment usually tracks between the average sentiment of Democrats and Republicans, but there’s a partisan divide there, too. The Michigan Survey asks independents if they are “closer to Republicans” or “closer to Democrats.” The partisan gap exists among Independents by their leanings, though it is somewhat narrower than among those who identify with a party.

The stark differences even among Independents could be consistent with differing information environments rather than strong ties to the party. The sentiment of Independents who say they are closer to neither party has drifted downward since the pandemic, so blaming the survey’s pessimism on Democrats does not hold up.

There's a more concrete problem related to such large partisan gaps. In the summer of 2024, the Michigan Survey transitioned from a phone to an internet survey to reduce costs. The transition coincided with a drop in the share of Republican respondents and an increase in the share of Democratic respondents. If the shares had remained at their level in early 2024, the current overall sentiment index would be 7 points higher. That would be enough to overturn the “all-time low” label, though it would still be downbeat. Michigan carefully constructs its survey to be representative of the U.S. adult population, but as with most surveys, it does not include political affiliation in its sampling frame. Small shifts in politics can result in big shifts in the index.

Avoiding the Michigan Survey is not the answer, and it would be wrong to assume it’s the only survey with these partisan divides. The political lens is almost certainly pervasive across sentiment surveys, but most do not collect information about political affiliation. The fact that Michigan collects political affiliations can be an advantage. Looking for declines in sentiment or increases in inflation expectations within political groups may be the best way to separate genuine economic shifts from partisan noise.

In closing.

For decades, the Michigan Survey has helped shed light on consumers’ views about the economy, and it still does — pessimism has deepened across the board, not just among Democrats. But the partisan divide has grown wide, and the survey has shifted in ways subtle enough to move the headlines. The overall numbers—whether sentiment or inflation expectations—need to be handled with care. The signal is still there; you just have to look within the politics to find it, not explain it away.

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Today, May 15, is Jay Powell’s final day as Fed Chair.

Powell was sworn in as Chair in February 2018. He inherited an economy with unemployment at 4% and inflation slightly below 2%—near both sides of the Fed’s dual mandate. He leaves the role with unemployment close to 4% and inflation above 3% and rising—a miss on the price stability mandate. The two endpoints do not do justice to the scale of the economic challenges—above all, the pandemic—that Powell navigated. A historic decline in employment (blue line below) at the start of the pandemic in 2020, followed by the highest inflation in forty years in 2021-22 (green line). It was also an active Fed, with the federal funds rate (orange line) ranging from zero to over 5%.

Inflation was elevated in five of the eight years; employment fell short in only two. By the numbers, it was a tenure marked more by inflation misses than employment shortfalls, but the numbers alone won't settle how Powell is remembered. The lessons for monetary policy in those eight years will be debated for many years to come, and with them, Powell’s leadership at the Fed.

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Pulling back the curtain on the Fed.

Powell's words will be as central to his legacy as his actions.

Forward guidance — using communication to steer markets — remained a struggle for the Fed under Powell. But that's largely because the future is hard to predict, not because the right words are hard to find. “Transitory” was a clunky term, but the real problem was the underlying judgment that inflation would subside on its own, not the communication.

The communication that Powell excelled at was talking to people, especially in times of crisis. His plainspoken manner and steady demeanor were a welcome counterbalance to the crises he faced. There are three examples across the past eight years that stick with me.

April 9, 2020 - The depth of the pandemic.

The pandemic was a once-in-a-hundred-year crisis that upended daily lives, roiled financial markets, and led to mass layoffs. Under Powell’s leadership, the Fed’s response was swift and aggressive. What stays with me is not the laundry list of lending facilities, rate policy, or economic forecasts. It's how he recognized the human costs and projected confidence in a path back to normalcy in the darkest days of the pandemic.

In this closing exchange with David Wessel, Powell perfectly met the moment:

Wessel: A lot of people are scared now … People want to know that our leaders, people like you, are confident that we can get through this.

Powell: This is going to be and is a very difficult time for many many people. People are getting sick. Their loved ones are getting sick. People are getting furloughed and laid off. People who started great businesses are seeing them shuttered. I wouldn’t want to say anything that diminishes the suffering that people are feeling. It’s going to be a tough time. But if the government continues to give people the support that they need. That includes us, that includes Congress, other parts of government. And if people stay home and stay healthy until it’s appropriate to go back to work. And if the health care policy experts devise a plan for a good way to go back to work and reopen the economy. If we do all of those things, there is every reason to think we can be back on the road to a recovery fairly quickly, and it can be a robust recovery.

Wessel: Well, as they say: from your lips to God’s ears.

It’s impossible now to convey how dark the world felt in early April 2020, and maybe that’s a blessing, but I remember the relief I felt listening to Powell. I needed to hear that with purposeful action, it would be okay.

August 26, 2022 - ‘There will be pain’ in fighting inflation.

Two years later, the crisis facing the economy was not furloughs and mass layoffs; it was surging inflation. In his annual Jackson Hole address in 2022, at the mid-point of four consecutive 75-basis-point hikes, Powell offered a blunt assessment of the pain that could result from higher interest rates:

Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance. Reducing inflation is likely to require a sustained period of below-trend growth. Moreover, there will very likely be some softening of labor market conditions. While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.

Powell invoked Paul Volcker, who, as Fed Chair in the early 1980s, brought inflation down at the cost of a severe recession:

History shows that the employment costs of bringing down inflation are likely to increase with delay, as high inflation becomes more entrenched in wage and price setting. The successful Volcker disinflation in the early 1980s followed multiple failed attempts to lower inflation over the previous 15 years. A lengthy period of very restrictive monetary policy was ultimately needed to stem the high inflation and start the process of getting inflation down to the low and stable levels that were the norm until the spring of last year. Our aim is to avoid that outcome by acting with resolve now.

It was a short speech, running nine minutes. Blunt and to the point. Powell didn't soften the message, and he didn't hide behind technical language. He told people what was coming and why. That’s what public accountability sounds like.

January 11, 2026. A stand for Fed independence.

In normal times, Powell's legacy would flow from the Fed's successes and failures during the pandemic, as the Global Financial Crisis defined Ben Bernanke's. But these are not normal times. Powell’s less-than-two-minute video statement earlier this year will be central to his legacy. It’s already the Fed’s most-watched video.

It was Powell's first public stand against a pressure campaign by President Trump — a campaign to lower interest rates that began soon after Trump elevated him to Chair in 2018. During the past year, disparaging words turned into actions: the President tried to remove Fed Governor Lisa Cook, and, in January of this year, the Department of Justice subpoenaed Powell as part of a criminal investigation. Powell met this assault on Fed independence with powerful words, too:

I have deep respect for the rule of law and for accountability in our democracy. No one—certainly not the chair of the Federal Reserve—is above the law. But this unprecedented action should be seen in the broader context of the administration’s threats and ongoing pressure.

This new threat is not about my testimony last June or about the renovation of the Federal Reserve buildings. It is not about Congress’s oversight role; the Fed through testimony and other public disclosures made every effort to keep Congress informed about the renovation project. Those are pretexts. The threat of criminal charges is a consequence of the Federal Reserve setting interest rates based on our best assessment of what will serve the public, rather than following the preferences of the President.

For the first time, Powell clearly called out President Trump's interference, and in doing so, became the first sitting Fed Chair to publicly accuse a sitting president of trying to bend monetary policy to political ends. He also underscored that the independence of the Fed isn't about protecting the institution; it’s about the quality of the policymaking:

This is about whether the Fed will be able to continue to set interest rates based on evidence and economic conditions—or whether instead monetary policy will be directed by political pressure or intimidation.

It's too soon to judge the choices Powell made in defending the Fed — when he stayed quiet, when he spoke out. He has said the administration's actions left him no choice but to defend the institution, and that's why he's staying on as a Fed Governor. I remain deeply concerned about the Fed’s independence. But whatever comes next, Powell's statement will be remembered. It was the moment a Fed Chair told the country, plainly, what was being done to the institution and why it mattered.

In closing.

Actions speak louder than words, but Powell’s words did real work — talking the country through the pandemic, laying out the cost of fighting inflation, and naming the threat to the Fed’s independence. A Fed that talks less to Wall Street would not bother me; forward guidance is most effective when used sparingly and only when the Fed can speak with conviction. But a Fed that talks less to the American people would be a grave mistake. The Fed should be clear about what it’s doing, why, and what it could cost.

We do not choose our challenges; we choose our response. Powell, like any policymaker, will be judged on outcomes, which reflect both the challenges he faced and the choices he made. The choice to keep talking, plainly and often, was one of his best.

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Signs of stability.

There have been encouraging signs in the labor market leading up to Jobs Day.

Job creation: Though monthly payrolls have swung up and down (dashed line in the chart) since the summer of 2025, the average pace has picked up. In the four months ending in March 2026, monthly job creation averaged nearly 50,000 (the solid line). While historically modest, it is the strongest four-month pace in almost a year.

The consensus forecast for April payrolls of about 60,000 would (barring revisions) move the average pace slightly higher. Estimates for April from ADP (109,000 private payrolls) and Revelio (66,000 total payrolls) were even above consensus. Even if payrolls surprise to the downside, as I suspect they might, or prior months are revised down, as has frequently been the case, the theme of stabilization should hold.

Unemployment rate: The sharp reduction in immigration over the past two years and ongoing population aging imply that very little job creation is necessary to keep the unemployment rate stable. In fact, the modest improvement in payrolls recently has coincided with modest declines in the unemployment rate. The unemployment rate in March was 4.3%, close to its level early last year. The consensus is for the rate to hold steady in April; the low level of initial claims for unemployment insurance during the past month is consistent with low, maybe even declining unemployment.

An improvement in the labor force participation rate, which has declined since late last year, could push the unemployment rate up modestly. As I've argued before, shifts in labor supply have made payrolls harder to interpret — low numbers are good enough numbers now. They can also affect the unemployment rate. The chart below decomposes the change in the unemployment rate since January 2023 (black line) into contributions from employment (blue bars) and the labor force (orange bars).

Increases in the labor force boosted the unemployment rate a few years ago, including when the Sahm rule triggered in the summer of 2024. More recently, declines in the labor force have held the unemployment rate down. As the labor market’s tone improves, we could see a ‘good news increase’ in the unemployment rate as participation picks up.

Allowing for the inevitable surprises, the April employment report is likely to extend the recent theme of stabilization.

Buffering higher gasoline prices.

A stable labor market is an improvement over last year, but it may not be a sufficient buffer against the higher costs since the conflict in Iran began. Energy prices are up sharply: the national average for gasoline (black line in chart) is more than $1.50 higher than before the conflict. The increase in diesel (red line) is even larger.

A stable labor market is an improvement over last year, but it may not be a sufficient buffer against the higher costs American families are facing since the conflict in Iran began in late February. Energy prices are up sharply: the national average for gasoline (black line in the chart) is more than $1.50 per gallon higher than before the conflict. The increase in diesel (red line) is even larger.

Higher prices, particularly for a necessity, reduce people's purchasing power. Higher wages, which increase a family's income, help buffer the hit. The April report's wage readings will be particularly important. Wage growth has slowed in recent months, but until recently still outpaced inflation; with the surge in energy prices, those inflation-adjusted gains are evaporating.

The buffer is also uneven. During 2021-22, lower-wage workers saw notably faster wage growth than higher-wage workers, which softened the hit to their purchasing power as inflation surged. That advantage has reversed: wage growth has slowed more for lower-wage workers, and their wages are now growing slightly slower than those of higher-wage workers. With inflation expected to rise further, low-wage workers face this energy shock without the extra buffer they had last time.

Bringing it back to the Fed.

Deciphering signs of stability in the labor market and assessing whether the labor market is buffering households are exactly the kind of questions the Fed will need to weigh. The Fed’s leadership transition adds another layer of uncertainty. The April employment report will be the first for Kevin Warsh to comment on as Chair (Powell’s tenure ends next Friday, and Warsh’s Senate confirmation is set for next week). As I argued in my recent Bloomberg Opinion piece, we know little about how he thinks about the labor market:

Warsh gave a perfunctory nod [at his confirmation hearing] to the Fed’s dual mandate — price stability and maximum employment — in last week’s testimony, but while he extensively discussed the former, he essentially ignored the latter. The two goals, enshrined into law in 1977, are coequal under the statute, but in practice, the Fed has historically given precedence to price stability. As Fed Chair Paul Volcker put it in 1981: “We will not be successful, in my opinion, in pursuing a full employment policy unless we take care of the inflation side of the equation.” Over the past 20 years, the Fed has moved away from that inflation-first view, building a more rigorous understanding of what maximum employment means and how to pursue it.

As he is when it comes to much of what the Fed does, Warsh is a vocal critic of the Fed’s thinking on maximum employment. In a speech he gave a year ago, he charged that, by describing maximum employment “as a broad-based and inclusive goal,” the Fed had “redefined its legislative remit” and signaled “a willingness to accept higher inflation so that certain groups would achieve higher rates of employment.” That reading gets both the Fed and the labor market wrong.

“Broad-based and inclusive” reflects US labor market dynamics, not a plan to be soft on inflation. The reality of maximum employment is that the last worker hired before inflation heats up does not look like the first. For example, the Black unemployment rate is almost always twice the White unemployment rate — except late in an economic expansion. At the first sign of softening, the gap reopens. Employment rates also differ markedly by gender, class, education and other characteristics.

Acknowledging those patterns is not “mission creep,” as Warsh often asserts. It is simply describing characteristics of the labor market the Fed is charged with maximizing.

All eyes are on inflation right now, so gaps in thinking about the labor market may not matter immediately. But conditions can change, and how much buffer the labor market provides could become central to the Fed's calculus as the year wears on.

In closing.

Jobs Day is a good time to take stock of the broad contours of the labor market. The headline numbers on jobs and the unemployment rate are a good starting point. But with low labor supply growth and a pickup in inflation, it takes more than usual to evaluate the quality of the labor market.

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After eight years, Wednesday will be the last time that Powell steps up to the podium as Fed Chair. It’s also the day that Kevin Warsh will be voted out of the Senate Banking Committee to the full Senate. He will be in place as Fed Chair at the Fed’s June meeting. Against the backdrop of extraordinary pressure from the President, there is nothing normal about this transition in leadership. But for all the talk of regime change, Wednesday is more likely the start of a test than the end of an era.

The end of an era or the test of an era?

I was tempted to call Wednesday “the end of an era” at the Fed. Warsh’s calls for regime change, if successful, would roll back twenty years of innovations in monetary policy at the Fed: Bernanke’s development of unconventional monetary policy (balance sheet and forward guidance), Yellen’s advancement of the maximum employment mandate, and Powell’s risk management under supply shocks. The Fed’s current thinking in those areas reflects mistakes, course corrections, and refinements. Warsh tends to focus on the mistakes, but there are some impressive moments, too. The Global Financial Crisis did not repeat the Great Depression; the disinflation after the pandemic didn’t require a recession; and the dual mandate is finally in practice, not just in the law. If the innovations during this era at the Fed are robust, they should stand up to Warsh’s scrutiny, and they should continue to improve. The test of an era starts Wednesday.

One example of a test is Warsh’s statement last week at his confirmation hearing, “I don’t believe in forward guidance.” Forward guidance is when the Fed talks publicly about the possible path of monetary policy. It’s one thing to say you don’t agree with the current tools of forward guidance, like the Summary of Economic Projections (I have), or to disagree about when or how guidance should be used. But to say categorically that you “don’t believe” in forward guidance is just too strong a statement. Forward guidance was one of the few tools the Fed had when the federal funds rate had already been reduced to zero after the Global Financial Crisis. Greater communication, including forward guidance, was also a way to improve accountability to the public and Congress. Ben Bernanke didn’t start the press conference because he liked stepping up to the mic. Maybe Warsh’s criticism could be an opening for innovation. The Federal Open Market Committee was unable to agree last year in its framework review on changes to the communication strategy. Maybe Warsh can bridge the differences, but going dark isn’t a reform; it's a retreat.

Should Powell stay or should he go?

I am wary of opining on whether Powell should resign or stay as a Governor after his Chair tenure ends in mid-May. Powell said he will decide based on what is “best for the institution and for the people we serve.” Powell has more perspective and insight on the current situation than anyone. His judgment on this is better than mine. As I have said before, Powell alone cannot defend the Fed’s independence. He has done an admirable job, and he has a network of bipartisan support in Congress, unlike anyone else at the Fed. Powell has shown a willingness and ability to withstand the scathing criticism and frivolous legal attacks from the White House. Warsh did nothing in his confirmation hearing to take on Powell’s mantle as a defender of the institution. Warsh avoided comment on Lisa Cook’s attempted firing and the criminal investigation of Powell—both of which are clearly political attacks on the Fed for not lowering rates. Warsh wouldn’t stand up to the President at his hearing, so let Powell do it. But no one should kid themselves. If President Trump continues to pressure the Fed to lower interest rates, the Fed’s safeguards will eventually buckle. Fed independence ultimately depends on the President, not Powell or Warsh.

One reason cited in the commentary for Powell staying is to prevent Trump nominees from holding a majority of the seven-member Board. The concern is that a majority of Governors could try to rein in the Reserve Bank Presidents. However, current Trump nominees on the Board, like Chris Waller, have weighed in against those measures:

Asked at an event in Washington whether he would fire reserve bank presidents over their interest rate views, Waller said he would "absolutely" oppose it: "That's not the design of the system. Period."

In his confirmation hearing, Warsh also clarified that his calls for “regime change” do not involve firing Reserve Bank Presidents over policy differences. Taking them at their word, it’s not clear what Powell’s staying accomplishes on that issue.

A better reason for Powell to stay is to see the investigation into the building renovations through to a close. Up to this point, Powell has been the main target of the investigations, but most of the Board has approved the annual budgets with the renovations. He has said he would stay “until the investigation is well and truly over.” We are not there yet. There are real costs to Powell staying — a political fight, and a real chance the President tries to fire Powell. So again, Powell is in the best position to weigh the costs and benefits.

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Expect continuity in policy even if the leaders change.

I worked at the Fed for over a decade. I saw people try to create change from the top to the bottom of the organization. I tried myself (on a small scale from the bottom), too. The Fed does change, but outside of a crisis, change is deliberate, not rapid, and it demands evidence. It takes a model to beat a model. We are thankfully not in crisis, and the gap between Powell and Warsh on many economic matters is not so large. Expect continuity and gradual change.

One example of differences that are less than at first glance: Warsh kicked up interest in alternative inflation metrics last week:

I am interested in the underlying inflation rate, not what is the one-time change in prices because of a change in geopolitics or a change in beef, but the underlying generalized change in prices in the economy. My broad sense is that the inflation risks and damage the last several years is improving. The measures I prefer are looking at things called trend averages, where we take out all of the tail risks, all of the one-off items …

The PCE trimmed mean from the Dallas Fed was 2.3% in February, well below the core PCE of 3%. What was lost in the ensuing debate was how similar Warsh’s takeaway on underlying inflation is to Powell’s. Powell has repeatedly said that tariffs can account for most of the above-target inflation in the past year. In fact, a study from Board economists implies that core PCE excluding tariffs is exactly the same as the trimmed mean.

The question is whether to act on that information. Powell has emphasized that the FOMC wants evidence that tariffs are a one-time pass-through to prices. They want evidence that it is a temporary inflation boost before cutting rates. Cutting based on ex-tariff or trimmed-mean estimates could look mistaken in light of the pandemic experience. Supply shocks are difficult to assess in terms of timing or breadth. If Warsh wants the FOMC to cut on the trimmed mean, he will have to overcome skepticism about these measures after the pandemic. The trimmed mean was slow to show the pandemic inflation.

More broadly than a debate about how to measure underlying inflation and when to act on the data, the Fed is likely to vote eleven to one in favor of holding its policy rate steady on Wednesday. The one dissenting vote will be Stephan Miran, who favors a cut. If Powell stays, Warsh will replace Miran. If Powell leaves and Miran stays, the pause-or-cut math could shift to 8-4 if all Trump nominees vote together. The pause holds in every scenario. Continuity in the wait-and-see is the baseline, even as the Fed’s leadership changes. Change will require time and a clear shift in the data.

In closing.

Wednesday is historic, but not for the reason the headlines will say. The era doesn't end because a new Chair shows up promising to end it. It ends (if it ends) when the evidence says so.

Tuesday, April 21, is a day Kevin Warsh has long awaited: his Senate confirmation hearing for Fed Chair. He lost out on Trump’s nomination to Jay Powell eight years ago. This time, he won the nod and is on track to replace Powell next month. Or is he?

At his hearing, Warsh must maintain his support among Republican Senators, avoid rattling financial markets, and convince President Trump to pull the plug on the Department of Justice’s criminal investigation of Powell. Otherwise, Fed Chair could slip through Warsh’s fingers once again. There’s nothing normal about this season of Fed Chair Apprentice, and it is far from over.

Warsh’s opening statement, which Politico published the day before, is a useful lens into the hearing and some of the policy questions he could face. There will also be questions about Warsh’s undisclosed financial entanglements, why he was mentioned in the Jeffrey Epstein files, and his loyalty to President Trump. I will focus here on three policy themes: Fed independence, Warsh’s theory of inflation, and financial deregulation.

The threat to Fed independence.

President Trump has repeatedly demanded that the Fed cut interest rates, despite inflation exceeding the Fed’s 2% target. In August 2025, Trump fired Fed Governor Lisa Cook, though she remains in place with her case before the Supreme Court, and Trump has supported the Department of Justice’s criminal investigation of Fed Chair Powell, launched in January 2026. Trump’s pressure campaign and his litmus test for a new Fed Chair who favors lower rates have made Fed independence a key concern.

That’s not how Kevin Warsh sees it. In his opening statement, Warsh argues that Fed independence is “largely up to the Fed.” Moreover, Warsh argues that the President sharing his views on interest rates is not a problem (emphasis added):

So let me be clear: monetary policy independence is essential. Monetary policymakers must act in the nation’s interest . . . their decisions the product of analytic rigor, meaningful deliberation, and unclouded decision-making.

I do not believe the operational independence of monetary policy is particularly threatened when elected officials—presidents, senators, or members of the House—state their views on interest rates. Central bankers must be strong enough to listen to a diversity of views from all corners . . . humble enough to be open-minded to new ideas and new economic developments . . . wise enough to translate imperfect data into meaningful insight . . . and dedicated enough to make judgments faithfully and wisely.

Simply stated, Fed independence is largely up to the Fed.

But Warsh’s platitudes ignore the current reality. Trump’s pressure on the Fed is far beyond words. Central bankers who oppose Trump’s views on interest rates do not need to be “strong enough to listen”; they need to be personally wealthy enough to cover the legal fees of cases brought against them in retaliation.

Warsh will undoubtedly be asked about the investigation against Powell. It would be an opportunity to show loyalty to Trump and thus fast-track his nomination vote. Warsh could signal his intention, if confirmed, to open an internal ethics investigation into the Fed’s building renovation and specifically Powell’s role in it. The Fed’s Inspector General reports to the Chair, so he would have that authority. The only way for Powell to avoid an internal investigation would be to resign from the Fed. Shifting the investigation of Powell from the Department of Justice to the Fed itself may offer an off-ramp for DOJ while keeping pressure on Powell to leave. It is a move that would please the President, but could alienate members of the Federal Reserve.

Theory of inflation.

The tension between Warsh the Fed critic and Warsh the Trump pick is sharpest when Warsh talks about his theory of inflation:

Congress tasked the Fed with the mission to ensure price stability, without excuse or equivocation, argument or anguish. Inflation is a choice, and the Fed must take responsibility for it.

In the spirit of his former mentor, Milton Friedman, Warsh has criticized the Powell Fed for using supply shocks, such as the pandemic and Russia’s invasion of Ukraine, as an “excuse” for higher inflation. Warsh’s “inflation is a choice” echoes Friedman’s, “inflation is always and everywhere a monetary phenomenon." Inflation is about government spending and the Fed printing money. The Fed, through monetary policy, can achieve any inflation rate it wants.

Warsh tries to have it both ways. It is hard to blame the Powell Fed for allowing above-target inflation during the Biden Administration on a forecast that it would be transitory, and then argue that with inflation still close to 3% under the Trump Administration, the Fed should be lowering rates on a forecast of productivity-induced disinflation. If inflation is the Fed’s choice and forecasting is fraught, as Warsh often claims, shouldn’t it be raising rates now to lower inflation?

In a twist of fate, Warsh, as Chair, would face his own energy supply shock. To lay the groundwork for rate cuts under his leadership, Warsh should “look through” the higher inflation caused by the conflict in the Middle East. In fact, to argue for immediate rate cuts as President Trump wants, Warsh should even push back on the Fed’s current “wait and see” approach. Then what’s Warsh’s rationale for cuts? A positive supply shock—productivity growth from AI that he expects to be disinflationary. So, Warsh is a monetarist when criticizing the Powell Fed, but a believer in accommodating supply shocks when he’s in charge?

Fed in emergencies.

Warsh became a Fed Governor in 2006 and resigned in early 2011. His formative years as a central banker were spent responding to the Global Financial Crisis and its immediate aftermath:

During the great financial crisis—when shocks hit our economy, unemployment spiked, our economic system faced collapse, and America’s standing in the world was scrutinized—our central bank played an indispensable role. My colleagues and I leveraged the tools and powers that the Fed, and only the Fed, had to deploy. We benefited enormously from the credibility that our predecessors had built up and passed down to us.

… In the period after the crisis, I also witnessed an institution that was tempted to play a larger role in the economy and society . . . to extend its reach and stretch its hard-earned credibility, often with the best intentions, to the very edge of, if not beyond, the Fed’s statutory responsibilities.

Today Warsh is a proponent of financial market deregulation and rolling back some of the financial reforms in Dodd-Frank. This is from someone who witnessed the damage caused by financial crises firsthand. That experience doesn't appear to have affected his thinking on financial regulation. In calling for lower rates, Warsh tries to repurpose Greenspan’s insights on productivity, but in pushing deregulation, he ignores Greenspan’s blind spots prior to the Global Financial Crisis. Warsh has a lot to say about the size of the Fed’s balance sheet, but very little about why balance sheet expansion was necessary in the first place or how the Fed should avoid emergencies.

In closing.

There have been ten Chairs since the Banking Act of 1935 created the modern Fed structure. Transitions in leadership are a normal rhythm of the institution. A Fed Chair’s legacy is more than his or her policy views. Their leadership style is critical. In how he would lead, Warsh describes himself as “one-time insider and the questioning spirit of an outsider” and positions himself as someone who will reform the Fed.

Warsh accuses the Fed of being stuck in the past: “the tyranny of the status quo.” But he is the one resurrecting Milton Friedman’s monetarism of the 1970s and Alan Greenspan’s productivity studies of the 1990s. Neither fits the current moment well, and they don’t even fit together. Hopefully, in his hearing, Warsh will clarify his thinking and help us see how the pieces fit together.

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Expect the unexpected has become the most useful rule of thumb for the economy. A series of supply shocks—the pandemic, higher tariffs, swings in immigration, conflict in the Middle East—has disrupted the usual patterns and created additional costs for businesses and consumers to navigate. The whiplash is showing up in the data, and it's easy to misread.

The jobs rollercoaster is a feature, not a bug

Jobs Day has been a rollercoaster this year: a pop of 178,000 in payrolls in March, after a drop of 133,000 in February and a jump of 166,000 in January. It’s tempting to write off that whiplash above and below zero as a data problem, but it’s telling us something fundamental about how the economy has changed.

Since the start of 2025, payrolls (orange bars in the chart below) have declined in 40% of months and have alternated between declines and increases since June 2025. Normally, such frequent declines would be a sign of deterioration in the labor market.

The current rate of payroll declines more closely resembles what we see during or directly following a recession, as the chart below shows. Historically, payroll declines are exceedingly rare, except around recessions. But recession is not the right comparison to now.

A supply shock is playing out in the labor market: the large increase in net immigration following the pandemic has more than fully reversed over the past year and a half. Population aging is also pushing down labor force participation.

Researchers at the Federal Reserve Board estimate that the potential labor supply will be basically flat in 2026. That’s well below the one-percent growth in labor supply in 2023-24 at the peak of immigration. It’s also slower than the half-percent growth before the pandemic. If the supply of workers isn't increasing, very little job creation is needed to keep unemployment steady. In their analysis, only 35,000 payrolls per month are sufficient in the first quarter of 2026 (green line).

With this breakeven pace close to zero, payroll declines become more common. Weather, strikes, issues with seasonal adjustment, and the usual imprecision in survey estimates create variation around zero, so some months are up, and some are down. Regular declines in payrolls are not a sign of a recession or a problem with the data—they are a sign that labor supply growth is very low. Get used to the whiplash on Jobs Day. It’s a feature now.

I also spoke on Bloomberg Radio about the broader implications of low labor supply. Hint: it should also reshape our views on what’s a good GDP print.

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Supply shocks: bad luck, bad policy, or both?

Inflation has also been whiplash-inducing over the past five years. A series of supply shocks has pushed up inflation: snarled supply chains during the pandemic, commodity disruptions due to Russia’s invasion of Ukraine in 2022, tariff increases throughout 2025, and now disruptions in the Strait of Hormuz.

In March 2026, Fed Chair Powell was asked whether that sequence was “bad luck, or has something changed in the world that makes supply shocks more common.” Powell emphasized the one-time, unrelated nature of the shocks:

You know, we did go through a long period where the shocks were all demand shocks, and so we’ve had a lot of practice thinking about supply shocks in the last four or five years, for sure … But has the world changed? I mean, COVID is a one-time thing, right? This energy supply shock is a one-time thing. It’s not—it’s not because of some broad tendency or anything … I don’t know that the world has changed in a way that there’ll be more supply shocks.

While the world may not have changed, the series of one-time shocks has contributed to five years of inflation above the Fed’s 2% target. The shock-and-awe approach of the current administration so far has led to larger policy shifts and heightened uncertainty. The evolution of tariffs during the past year is a good example. An analysis from the Yale Budget Lab documents the large, uneven increases in the effective tariff rate (blue line below) in the first half of 2025. Since late 2025, there have been more tariff exemptions, and in February 2026, the Supreme Court struck down a large portion of the tariffs, which the White House is reconstituting under alternate trade authorities.

The tariff increases have raised importers’ costs, and businesses have passed at least some of these costs along to consumers via higher prices. Research from the Federal Reserve Board finds that tariffs can fully explain the surge in core consumer goods prices (which exclude food and energy). Absent the tariffs (blue line below), they estimate core goods prices would have fallen in 2025, similar to their pre-pandemic pattern. Instead, these prices rose sharply (black line).

The pickup in core goods inflation kept overall inflation stuck near 3% in 2025, offsetting slowing housing inflation. These same researchers argue that the “passthrough” of tariffs to the consumer price level is essentially complete, so core goods inflation should return to normal. That’s a reasonable prediction, but the Fed wants evidence of inflation moving toward 2% before cutting rates.

The Fed was already in wait-and-see mode when the latest supply shock struck: the sharp rise in gasoline and diesel prices in March 2026 was the front edge of disruptions from the war in Iran. Since the temporary ceasefire began in early April 2026, global oil prices have fallen substantially, though they remain higher than before the war. Even under the best-case scenarios, it will take several months to fully resolve the disruptions to energy markets. Those disruptions will push up inflation, even if only temporarily. Given the uncertainty, it’s another reason for the Fed to wait for data showing lower inflation. A whiplash economy makes it harder to act on forecasts.

On Yahoo Finance, I talked about how the March CPI showed signs of whiplash:

Trying to avoid costs comes at a cost.

The costs of a whiplash economy extend beyond the shocks themselves. Adapting to them imposes costs, too. People and businesses work to reduce their exposure to the shocks. Adaptation buffers some of the cost shocks but also creates others.

The tariffs illustrate costly adaptation. The actual tariff rate paid by US importers — total tariffs collected divided by the total value of imported goods — has been well below the announced rate. According to economists at the Federal Reserve Board, the announced tariff rate (dashed line in the chart below) was almost 15% by December 2025, while the actual tariff rate was 12% (blue area). The gap between the two was even larger directly after Liberation Day in the spring of 2025.

The gap reflects two things. First, a composition effect (red area)—importers shifting the mix of imports toward lower-tariffed products. Second, rate discrepancies (tan area)—importers finding ways to lower the tariff rate on the imported products. These two adjustments cover a range of behaviors, such as frontloading imports before tariffs took effect, altering supply chains so that more production occurs in lower-tariffed countries, certifying US-Mexico-Canada (USMCA) trade compliance to receive a tariff exemption, and using bonded warehouses or free trade zones to delay paying tariffs.

Some of these are temporary ways to reduce tariff payments, and some are permanent, but they all require additional effort and money compared to before the tariff increases. The adaptation to tariffs in 2025 occurred more rapidly than to the tariffs in 2018-19, which could be a sign of learning, as the researchers suggest:

Many firms have had experience diversifying suppliers after the 2018—2019 U.S.-China tariff hikes and the COVID pandemic, leading to more agile supply chains. Furthermore, the size of the tariff hikes in 2025 is much more significant, and thus, the cost of paying higher tariffs is more likely to outweigh the substantial cost of finding new suppliers.

It’s harder to measure the indirect costs of adjusting to tariffs than the direct costs of higher tariff duties. But the sharply negative tone in business surveys over the past year almost certainly reflects some of the indirect adjustment costs.

Uncertainty is another cost of a whiplash economy that's hard to quantify. It complicates decision-making at every level. In March 2026, with the start of the war in Iran, small business optimism (per the NFIB index) fell below its historical average, repeating a pattern last seen in April 2025 after Liberation Day tariffs. Uncertainty also rose, as this comment from a retailer in Iowa reflects:

The overall state of my business is good at the moment, however with all the uncertainty in the economy (tariff surcharges, high freight charges, skyrocketing insurance rates, and the war with Iran), I feel to cover the increased cost I may price myself out of the market. Lowering prices is only an option if prices of inputs come down and that doesn’t look like it will happen in the near future.

That retailer, like many businesses, looks good on paper now, but the whiplash economy is wearing. Even if everything works out in the long run, the near-term costs and the uncertainty are a burden.

Costs of whiplash are piling up.

Consumer sentiment in early April 2026 hit an all-time low, but that’s not simply a reaction to the war in Iran and higher gasoline prices. It’s the cumulative reaction to a long series of unexpectedly higher prices and disruptions since the pandemic.

In the latest survey, over half of families said that they were worse off than a year ago due to higher prices. That’s a record high—but higher prices have been a persistent source of strain. The share of families saying they are worse off due to higher prices has been above 40% in most months since mid-2022.

Just as businesses adapt to higher costs, households may feel "worse off" partly because of the effort they put into managing these unexpectedly higher prices. The effort of adapting, like hunting for deals and switching brands, may be seeping into how people assess their finances, even if they don’t cut back on spending.

In closing.

We are living in a whiplash economy, and it’s rewiring basic relationships in the data. Large swings in labor supply have scrambled the usual recession signals. Repeated supply shocks have kept inflation elevated, and the cost of adapting to them falls on businesses and consumers. Uncertainty is high, and decision-making is harder for everyone, including the Fed. It may end up being just a run of bad luck, but it’s our reality for now.

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It’s three weeks into the war in Iran, and when the dust settles after today’s Fed meeting, the potential economic costs are likely to feel more real. The headlines will be hawkish, highlighting the Fed’s greater emphasis on inflation, but downside risks to employment and disposable income will also be heightened. Stagflation concerns are back.

Key points:

• Be realistic. The economic consequences of the war in Iran could be substantial, and the Fed must plan for all contingencies. Even if their base case is only a temporary disruption, the uncertainty at this point is immense. Risk management will be a dominant theme.

• Pay attention to the FOMC statement. It’s a consensus view. The Fed will hold rates in the range of 3‑1/2% to 3‑3/4%, as expected before the war began. The stagflationary impulses of the war warrant including “two-sided risks” in guidance on the policy rate, meaning the next move could be a hike or a cut. Previously, the committee had signaled that the next move would likely be a cut. The main theme will be patience in the service of collecting information, paired with a commitment to move as soon as direction is clear. There could be up to three dissents (Miran, Bowman, and Waller) in favor of a cut, but given how fluid the situation in the Middle East is, there ought to be full agreement to hold.

• Ignore the Summary of Economic Projections (and the so-called dot plot). The Fed suspended the SEP in March 2020 due to the heightened uncertainty at the start of the pandemic. They should do the same in March 2026. The SEP is a set of baseline forecasts. We know too little about the war in Iran for this to be a useful exercise. Now would have been a great time for scenarios, as Ben Bernanke proposed. Setting aside my ‘what-they-should-do’ views, the Fed will publish the SEP in its usual format, and it will be hawkish.

• Listen carefully to Powell. Risk management has been central to his leadership of the Fed, and the war in Iran is the latest supply shock under his tenure. The press conference is an opportunity to discuss risk scenarios. There are plausible events that could lead to a cut, extended pause, or hike this year. As he did in the pandemic, Powell will bring humanity. The war in Iran is more than prices at the pump or paychecks in the United States; the effect on people in the Middle East and around the world is real, and the objectives go far beyond the Fed’s dual mandate.

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Don’t overinterpret a hawkish SEP.

The SEP is likely to be hawkish—higher expected inflation and fewer rate cuts. In December, the median Fed official expected one 25-basis point cut this year and another next year. The updated projections this month are likely to have a median of no cuts this year and one next year. The longer run rate might even be revised up.

A good gauge is projections from a few dozen former Fed officials and former Fed staff organized by Jon Hilsenrath. (Hilsenrath is a former WSJ Fed journalist, and a very astute observer of the Fed in his own right.) The median projections from this group are below and are compared to the Fed’s SEP in December. The revisions to the median are downbeat: lower growth, higher unemployment, and higher inflation, though modest in magnitude, reflecting a temporary disruption from the war.

Even with a temporary disruption, the entire path of the federal funds rate from 2026 through the longer run is revised up. The median in this group of former Fed officials and staff, as with the median among current Fed officials, masks wide disagreements about appropriate monetary policy. The war in Iran has only amplified that disagreement.

In the survey of former Fed officials and staff, the hawkish shift is clear. At the end of last year, less than 5% of participants thought a hike in interest rates would be appropriate in 2026; now, more than 20% see a hike as appropriate. The percent who view a cut in 2026 as appropriate dropped from 40% to 30% across the two surveys.

I expect a similar hawkish shift in the actual SEP. Keep in mind that the SEP is a communication device, and some Fed officials will see a benefit in erring on the side of hawkish communications to bolster the Fed’s credibility as an inflation fighter. The SEP is too blunt a tool for delivering such a nuanced message, and the uncertainty about the war is immense, so I would caution against reading too much into the SEP as a prediction of likely monetary policy this year.

Powell's supply shock playbook.

In terms of how the Fed should respond, the war in Iran calls up comparisons to oil embargoes of the 1970s or Russia’s invasion of Ukraine in 2022. That’s too narrow a scope. The effective closure of the Strait of Hormuz is a major global supply shock, raising the cost of energy and related products. The pandemic, which snarled global supply chains and restricted the labor force, was a supply shock. Tariffs—in the first and second Trump administrations—which raise the cost of imported goods and reduce productive efficiency, are also a supply shock.

Put simply, Powell’s tenure as Fed Chair since 2018 has been navigating one supply shock after another. The key questions for the Fed now are familiar: how long will the supply disruption last, how severe will it be, and whether it will become embedded in inflation expectations. Also, the high degree of uncertainty, especially at the onset, is familiar. Finally, as with last year, and markedly different from 2022, the supply shock from the war in Iran coincides with a labor market with some weakness. Once again, there are upside risks to inflation and downside risks to employment.

At the press conference, I expect Powell to elevate the risk-management approach and to reiterate how the Fed operates when both sides of the dual mandate are at risk. The Fed’s strategic framework lays out the approach:

The Committee’s employment and inflation objectives are generally complementary. However, if the Committee judges that the objectives are not complementary, it adopts a balanced approach to promoting them, taking into account the extent of departures from its goals and the potentially different time horizons over which employment and inflation are projected to return to levels consistent with its mandate. The Committee recognizes that employment may at times exceed real-time assessments of maximum employment without necessarily posing risks to price stability.

Put simply, when there’s tension between employment and inflation, the Fed tries to address what it sees as the biggest, most persistent problem. It’s trying to avoid the worst outcome.

The Fed’s three rate cuts last year fit this approach. Fed officials viewed the downside risks to employment as a more urgent concern than the upside risks to inflation. The SEP, which focuses on baseline forecasts rather than risk scenarios, is poorly designed to capture these trade-offs.

However, relative to before the war in Iran, I expect Powell to sound more hawkish today. The upside risks to inflation are worse than with the tariffs last year. A reasonably bad risk last year was that inflation would become stuck at 3%. If the war in Iran were protracted, it could cause a surge in inflation. It’s not to say that’s likely, but at this point it cannot be ruled out. On the flip side, a recession cannot be ruled out either. Incoming data chipped away at signs of improvement in the labor market. It’s a balancing act in a moment of great uncertainty.

In an interview a few weeks ago, Fed Governor Chris Waller was asked to assess developments in the Middle East. He emphasized scenarios:

What you’re gonna see is a spike in gasoline prices. Thinking about policy going forward, it’s unlikely to cause sustained inflation. That’s one reason we don’t look at energy prices. That’s why we look at the core. It’s a better predictor of future inflation. Once the supply chain issues unravel, the prices will come back down. It becomes bigger if it becomes more permanent. Then it will bleed into other parts of the economy. In the 1970s, the oil shocks kept coming and coming. This is more like a one-off event.

Until the worst-case scenarios of a more persistent supply shock are off the table, the Fed is likely to tread cautiously and hold rates steady.

In closing.

Today’s Fed meeting is likely to be a reality check. The situation in the Middle East is serious, and the risks to the US economy are substantially greater than they were even a month ago. The concerns about inflation and the potential for the Fed’s next move to be a rate hike may draw the most attention, but the key takeaway should be a focus on risk assessment and risk management. It’s a difficult time, but it is one for which the Fed has prepared.

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