Federal Reserve Chairman Kevin Warsh convenes a monetary policy meeting this week, with traders anticipating a hike in interest rates. Renewed hostilities between Iran and the U.S. have pushed oil above $100 a barrel, raising concerns that the surge in energy prices will fuel inflation.
The meeting begins on Tuesday and will be Kevin's second as Fed Chairman. A week ago, futures markets priced the probability of a quarter-percentage-point rate increase at less than 10%. By Friday, that probability had risen to 36%.
Investors now largely expect one rate hike by September. They also anticipate another one or two quarter-point increases over the next nine months. Oil has remained volatile since the war began in late February, as Washington and Tehran have alternated pauses and renewed attacks.
Traders had calculated that a closure of the Strait of Hormuz would cause only a brief inflationary disruption, despite around one-fifth of the world's oil typically passing through that route.
Rising Oil Prices Push Traders to Prepare for Fed Tightening
That belief has weakened after oil surpassed $100. Investors sold government bonds across the U.S. and Europe, pushing bond prices down and yields up.
The yield on the 10-year U.S. Treasury note reached its highest level in 18 months. Yields on 10-year German and French bonds also rose to levels not seen in over 15 years. Long-term yields rise when markets anticipate persistent inflation.
Kevin has another reason to consider raising rates, given the latest U.S. statistics showing a resilient labor market: on Thursday, weekly jobless claims fell to their lowest level since 1969. Although consumer inflation in June eased to 3.5%, it remains well above the Fed's 2% target. Officials may be less inclined to delay tightening if the economy is strong, layoffs are few, and oil prices are high.
Kevin gives no explicit hints ahead of policy decisions. Advocating a deliberate approach to policymaking, he has called for an end to preemptive signaling. "If we get policy right, which we will, the inflation spike of the past five years will be left in the past," he told lawmakers this month.
Kevin says little else. He hasn't disclosed which inflation measure he prefers or which economic data he finds most reliable. Instead, he has asked internal working groups to study these issues. This contrasts with the Fed's more communicative approach over the past 20 years.
Kevin Keeps Policy Debates Secret as Congress Demands Clearer Answers
At his swearing-in ceremony at the White House in May, Kevin thanked former Federal Reserve Chairman Alan Greenspan for first "showing me what this job requires"
Alan passed away last month at the age of 100 and was known for answers that left listeners guessing. He once joked: "If my remarks seemed clear, you must have misunderstood me"
This month, Kevin testified before Congress for over five hours but offered few firm opinions. Some responses differed from his previous statements. Representative Ritchie Torres, a Democrat from New York, read him a portion of Kevin's testimony from April during his confirmation hearing.
During the hearings, Kevin spoke favorably of an inflation indicator that excludes the most significant monthly price changes, rather than using a measure the Fed has relied on for years. When Ritchie asked about this, Kevin denied endorsing such an indicator.
"None of these measures is a good enough indicator of underlying inflation," said Kevin. "If I had a preferred measure, I would not be calling for a working group to go back to first principles"
Kevin hasn't committed to following the press conference schedule used by his predecessor, Jerome H. Powell. Jerome held a press conference after every policy meeting, explaining how officials viewed the economy and describing views expressed within the interest-rate setting committee. Kevin's communications working group is reviewing this schedule.
Last month, journalists asked Kevin what might prompt the Fed to raise rates. He responded: "I can't give any specific guidance on what we are going to do next. The good news is we will meet again in six weeks," referring to the meeting on Tuesday. He said he wants each policy meeting to be a "family quarrel," where officials debate in private rather than announcing the outcome before the meeting begins.
