The war in Iran has caused oil prices to soar, raising concerns about a resurgence in inflation. That has led Federal Reserve officials to raise the possibility that they could pause the Fed’s recent efforts to reduce interest rates, or potentially even raise rates.
But that is the Federal Reserve as it is known now. The central bank will likely soon have a new leader who views inflation very differently. Kevin Warsh, if confirmed by the Senate, would almost certainly feel comfortable lowering rates despite rising oil prices.
Warsh is President Donald Trump’s nominee for the next chairman of the Federal Reserve. He would replace Jerome Powell, whose term expires on May 15. Trump officially sent Warsh’s nomination to the Senate on Wednesday.
Warsh said in the run-up to his election that he believed interest rates should be lower than the current federal funds rate of 3.5% to 3.75%, and Trump has made clear that he chose Warsh because they share a desire for lower rates.
Rising inflation could be a tough challenge for a nominee who needs to thread the Senate confirmation needle while retaining the president’s support.
a barrel of raw brent It sold for about $72.50 on Friday, before the military campaign between the United States and Israel took place. On Wednesday night, it was trading at more than $82. Gasoline prices have risen, raising the specter of higher prices across the economy as Republicans seek to convey an affordability message in the midterm elections.
A lasting $10-a-barrel rise in the price of oil could add up to a tenth of a percentage point to the so-called core inflation measure the Federal Reserve focuses on, Daleep Singh, global chief economist at asset manager PGIM Fixed Income, wrote in a note to clients late Tuesday.
In that scenario, “Powell’s Fed’s most likely response would be to validate an extended pause,” wrote Singh, who advised then-President Joe Biden on national security matters.
These questions can be academic. The Trump administration says it has plans to help reverse rising oil prices, and the war may be over when Warsh takes office in May or June.
Fed members differ from Warsh
Some of the Federal Reserve’s voting members have said they are concerned about how Iran will negatively affect the economic outlook, showing more concern than Warsh would likely show as chairman.
“I was very confident until a couple of days ago,” Minneapolis Federal Reserve President Neel Kashkari said at a Bloomberg event in New York on Tuesday. Now, he said, he needs to see more data to make a judgment about what should happen to interest rates.
New York Federal Reserve President John Williams said at an event in Washington on Tuesday that he wanted to see “how persistent this is.”
This is business as usual for the Powell Fed. He has paid close attention to how conflicts affect oil prices and inflation in general. Powell warned in 2022, after Russian President Vladimir Putin launched an invasion of Ukraine, that “rising crude oil prices” were “creating additional upward pressure on inflation.”
Warsh sees it differently. “Federal Reserve leaders blamed Putin for inflation,” Warsh told Fox Business’ Larry Kudlow in July.
Fed’s ‘core theory of inflation’ is ‘wrong,’ Warsh said Barron in the fall. The institution constantly tries to refine its assessments of how supply and demand are affecting prices. But the rise in post-Covid inflation is clear evidence, in Warsh’s view, that the Fed has been looking at the wrong factors.
“In essence, I think inflation occurs when the government spends too much and prints too much,” Warsh said then.
Modest fluctuations in oil prices don’t count for much in that worldview. He believes he can lower the long-term interest rates that matter most to consumers by freeing the Fed from some of the $6.5 trillion in financial assets it has acquired in recent years and generally restoring faith in the Fed’s credibility.
Warsh also hopes that advances in artificial intelligence will make the economy more productive and believes rate increases would put those gains at risk.
The Federal Reserve declined to comment. Warsh has not spoken publicly since Trump announced him as his pick on Jan. 30. Warsh declined to comment for this article.
The Federal Reserve chairman has only one vote in a dozen on his rate-setting committee, but disagreements against the chairman are rare.
The Federal Reserve was designed by Congress to be free of political influence, but the president has influence in deciding who to nominate. Trump has insisted that rates should be 1% or less.
Warsh’s inflation theory is designed to present essentially bulletproof arguments for cuts in this economy unless something changes dramatically. Not even an all-out air war with a major global oil producer will change that.
