Kevin Warsh Faces Rate Increase Question on CPI Eve: 'What Would it Take For a Hike?' Asks Former Fed Economist Claudia Sahm
Federal Reserve Chair Kevin Warsh faces a fresh inflation test Wednesday as the Consumer Price Index report lands, with economists debating what it would take for the Fed to consider raising interest rates rather than cutting them.
Economists Weigh Fed’s Next Move
Former Fed economist Claudia Sahm said in a post on X Tuesday, “CPI Eve,” was a good time to revisit what it would take for the Fed to hike rates, while adding that inflation news since her last analysis had been favorable and questioning whether that trend would hold in Wednesday’s report.
Her July post had drawn on two scenarios from the central bank’s June meeting minutes, putting a 60% chance on the Fed holding rates and a 40% chance on a hike.
The Fed left its benchmark rate unchanged at 3.50%-3.75% at its July meeting, extending its pause for a fifth straight meeting, though three officials dissented in favor of a 25-basis-point increase.
El-Erian Flags Services and Energy Spillover
Economist Mohamed El-Erian said consensus forecasts will be closely watched to gauge how much energy price increases since February have spilled into core inflation, how strong services inflation remains, and how those trends could shape the Fed’s policy thinking.
Wednesday’s report is forecasted to show headline inflation cooling to 3.4% from 3.5%, with core inflation at 2.5%.
June’s headline CPI came in at 3.5% year-over-year, down from 4.2% in May and below the 3.8% forecast, with prices falling 0.4% month-over-month, the first monthly decline since the pandemic.
Debt Load Adds Pressure to the Decision
The debate over rate policy comes as the national debt exceeds $39.89 trillion.
Economist Peter Schiff said last week that rising debt makes it harder for the Fed to raise rates even as it becomes more necessary, as the growing debt is what’s driving inflation as the government works to finance it.
Warsh’s communication approach has also drawn scrutiny since his first FOMC meeting as chair in June.
However, Cato Institute economist Jai Kedia told Benzinga it is unlikely a single inflation report would cause any meaningful change to stocks, adding that markets are already pricing in a worse report than June, so only a serious shock would have a sustained effect.
Disclaimer: This content was partially produced with the help of AI tools and was reviewed and published by Benzinga editors.
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