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Kevin Warsh is about to face his first real trial by fire, and this morning’s CPI print took most of his options away.
The consumer price index rose 0.4% in August, putting the annual rate at 3.4%. Core came in at 0.3% for the month, a tenth hotter than anybody expected.
Traders looked at that and immediately priced a quarter-point hike at about 90% for next Wednesday. It was sitting near 70% before the number landed.
So, the argument about whether he hikes is more or less over, which means the interesting question is the one nobody’s asking yet…
What happens after?
How this market reacts to the decision matters far more than the decision itself, and I’d argue it sets the tone for everything between now and the midterms.
At 90% priced, a hike is already baked into the market. Everybody knows it’s coming, everybody’s positioned for it, and the announcement itself should be a non-event if the market’s doing its job.
The shock event would be him not hiking.
Because if he blinks now, after telling Jackson Hole that inflation hasn’t meaningfully improved and the Fed has work to do, then every word out of that building loses value. And a central bank nobody believes has to raise rates far higher down the road to get the same result.
Remember this… it’s not the call that’s important here, it’s the echo.
Warsh is in chains already. Let me lay out the trap, because it’s a real one.
Warsh took the chair in May. He held rates steady in June and again in July, and that July vote was 9 to 3, with three members on his own committee arguing that rates needed to go up.
The last time this Fed moved at all, it cut. That was December of 2025, and the target has sat at 3.5% to 3.75% ever since.
Meanwhile, the ten-year is at 4.86%, the highest since November of 2023, and knocking on 5%. Gasoline jumped 3.9% last month and accounted for more than a third of the entire CPI gain. Energy is up 16.3% over the year.
Don’t even get me started on the possible $1.3 trillion boondoggle that could spike inflation and just made his job even harder.
So he can hike, prove the Fed is independent, and take the blame for whatever the market does about it heading into an election season.
Or he can hold, keep the peace, and watch his credibility go out the window along with the bond market.
Is he all hat and no cattle, or is he the real deal?
Guess we’ll find out on Wednesday.
Forget the decision itself and watch the two days after it.
If the market takes a hike and shrugs, that tells you the pain was already absorbed, and we can start talking about what’s cheap again.
If it takes a hike and falls apart anyway, then the hike was never the problem. The problem is a ten-year at 5% and oil over $100, and no Fed decision fixes either of those.
Warsh is smack dab in between that proverbial rock and a hard place, and the market’s eventually going to force him to take the medicine. The only thing he gets to decide is whether it happens now or later.
Kevin Warsh isn’t new to being thrown into the deep end. Back in 2006, President Bush appointed him to the Fed’s Board of Governors at just 35, making him the youngest Fed governor in history.
He’d barely settled in before the 2008 financial crisis hit, and he ended up as the Fed’s primary liaison to Wall Street during the worst of it. Nearly 20 years later, he’s facing his first real test as Chair on Wednesday, same as it ever was.
