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- Fed Chairman Kevin Warsh is unlikely to raise interest rates at this week’s FOMC meeting.
- A rate hike would risk prejudging task forces Warsh created to rethink inflation, AI, data and Fed communications.
- Warsh has suggested one-time price shocks from energy or AI-related demand are not automatically inflationary.
- The decision also carries political risk as Warsh manages President Donald Trump, FOMC member and former Fed Chair Jerome Powell and future Fed board dynamics.
Federal Reserve Chairman Kevin Warsh testifies during a Senate Banking Committee hearing titled “The Semiannual Monetary Policy Report to the Congress” on Capitol Hill in Washington, July 15, 2026.Ken Cedeno | Afp | Getty Images
Federal Reserve Chairman Kevin Warsh isn’t likely to oversee an increase in interest rates at this week’s Fed meeting, for at least three reasons.
First, Warsh personally doesn’t seem to buy the arguments for hikes. Second, raising rates would undermine the outcomes of his task forces. And, third, a rate increase risks putting him on the wrong side of some uncomfortable politics with the Trump administration.
And yet Warsh faces a divided Federal Open Market Committee, with perhaps three or four people out of a dozen voting members prepared to call for immediate rate increases. Investors see a nearly 40% chance of a rate increase this week, according to CME FedWatch. Warsh would face an uphill climb at the committee meeting to merely keep rates steady, so how he addresses each of those three key rationales will be revealing.
First, Warsh arguably doesn’t want higher rates right now, and he hasn’t promised anything. He has committed to ending “forward guidance,” a practice of precommitting the Fed to a particular course on interest rates. That means he won’t say in advance how he plans to vote when the FOMC meets.
But Warsh has given some clues to his so-called reaction function, or how he and the Fed more broadly interpret and respond to incoming data. Warsh has weighed in specifically on how he processes data on two large forces stressing the economy: energy-price hikes from the Iran war, and rising costs for semiconductors and electricity as companies build out their artificial intelligence capabilities.
Gas and diesel prices have shot up in recent days after the U.S.-Iran ceasefire broke down. Warsh described that in fairly dismissive terms in Senate testimony on July 15: “Particular price shocks happen to particular prices that we don’t have control over.” In other words, there is little the Fed can do in the short run to expand capacity at maxed-out U.S. refineries.
That might be a problem if the spike in energy prices looked to be raising prices more broadly across the economy, but consumer-price-index data for June released just before Warsh spoke showed broader prices actually falling before the recent return to hostilities.
Some of Warsh’s colleagues at the Fed have warned about the potential for tech companies to raise prices on semiconductors, electricity and more as they spend heavily to build out their artificial intelligence capabilities. But as with energy, Warsh told the Senate he wasn’t necessarily concerned. He doesn’t “view a one-time change in prices as necessarily being inflationary, because I think there’s a supply response in that way.”
The Fed will have to decide whether this particular shift in supply and demand constitutes the kind of inflation that needs to be addressed with a higher interest rate, Warsh said. In other words, the FOMC’s reaction function under his leadership will become clearer after this meeting.
The second point is closely related. Warsh has established a series of task forces due to report in late 2026 and beyond that are intended to answer precisely these types of questions in a lasting way. Is artificial intelligence speeding up growth without driving up prices? Is the Fed thinking the right way about inflation overall? There are task forces for both.
If Warsh votes in favor of an interest-rate increase at what will be his second FOMC meeting as chairman, he will essentially be conceding those arguments. The whole point of the task forces was to muster political capital. Warsh will be better off in achieving his goals later if he plays for time now.
Another of Warsh’s task forces deals with questions such as how often should the Fed hold press conferences? Another reason he can’t skip this one.
Conversely, if Warsh does surprise and raises rates, that will be an important signal that he sees the current inflation situation — and the risks to the Fed’s credibility — as serious enough that he’s willing to undercut his signature reform effort.
Third are the direct political considerations. Warsh has said loudly and often that he will make his own decisions about interest rates, regardless of what President Donald Trump thinks. But that isn’t to say Warsh can ignore Trump entirely.
Warsh could use more allies on the Federal Reserve board. The next opportunity to gain one will come when former Chair Jerome Powell leaves the board. He can stay through January 2028, but may depart sooner if the Fed’s inspector general issues a clean bill of health in its investigation of the Fed’s renovation cost overruns — and if Trump’s Department of Justice opts to leave Powell alone in the wake of the report.
That report is due this summer, Warsh has said. Powell may well see fit to resign in its wake.
But that would require Trump resisting the urge to antagonize him, which is already proving tough. Trump said Monday he wants interest rates to be lower, but noted the Fed’s board was a problem. “You need the consent of some people that have perhaps bad intentions,” Trump said, in a thinly veiled reference to Powell.
The politics here are delicate. Warsh has to avoid giving Trump openings to attack Powell. Raising rates this week would play into conservative conspiracy theories that Powell is secretly a “shadow Fed chair,” as Treasury Secretary Scott Bessent has described him. And even if Powell does indeed resign after the IG report, Warsh will want some say in Powell’s successor — a nomination Trump controls. Warsh can’t entirely ignore the president.
Warsh could give clues on the IG report at this meeting, as well as on a second, outside inquiry into the Fed’s handling of bank troubles in 2023 that has some worried it could be used as a pretext to oust board members.
It isn’t possible to cleanly predict what the Fed will do, for the simple reason that the Fed’s outcomes aren’t decided in advance anymore. Warsh will sooner or later have to deliver the first rate hike of his tenure. But for now, he has strong reasons to hold off, just a little longer.
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