Kevin Warsh’s next hurdle

A wise oracle (read: Fed Chair) emerges from a cave (read: Washington, DC) to offer a proclamation to the public: We’re holding rates steady.

We have a feeling Kevin Warsh, who presided over his first rate-setting Federal Open Market Committee (FOMC) meeting last week, already bought his tickets to watch Christopher Nolan’s The Odyssey in IMAX.

In any case, Warsh wants to channel some Greek prophecy-esque energy when it comes to communicating with the public: As he framed it to an audience of investors last year, the goal is “more thinking, less talking.”

But last Wednesday, he had no choice but to talk: The Federal Reserve reached the unanimous decision to keep interest rates steady in the range of 3.5% to 3.75%, marking the first vote since June 2025 to lack opposition. Roughly half of FOMC members forecast a rate hike by the end of the year. Notably, Warsh declined to make any of his own forecasts.

The Fed’s released statement was also “a bit shorter, a bit simpler and it dispenses with some older language,” Warsh said. “That statement just gives you the facts, as best we can judge it.”

“Absent, also, is so-called forward guidance, which we agreed was not well suited to the current policy conjuncture,” he added.

While some changes at the Fed are clearly afoot—Warsh also announced five task forces to examine Fed operations—the trickier part for Warsh will most likely be navigating interpersonal FOMC dynamics and outside pressure amid an increasingly complex economic backdrop. Talk about an odyssey.

To hike or to cut. “All this talk about, ‘Will the Fed hike rates? Won’t the Fed hike rates?’ It’s all about inflation,” Padhraic Garvey, regional head of research, Americas, at ING, told CFO Brew. “It’s not that the economy is on fire, or anything like that. It’s that we’re staring down the barrel of [nearly] 4% inflation, and that’s uncomfortable.”

Should the US and Iran reach a final ceasefire agreement, which would include reopening the Strait of Hormuz, “inflation should begin to fall over the rest of 2026,” Garvey said. “We probably have two more months of problematic inflation data to get through, and once we get through that, in all probability, inflation comes back down again. Over the course of 2027, we expect inflation to be down to 2%.”

“If you’re Chair Warsh, you can do what you like with that,” he continued. The uncertainty is that the rest of the economic backdrop is a moving target, too.

“What you find at the moment is that S&P earnings per share: super super hot, really strong. What’s not hot is the labor market, what’s not hot is affordability, and the area of credit, generally speaking, is stressed,” Garvey said. “The whole logic for arguing that the bias should be towards a nudge lower in rates, as opposed to a nudge higher, is that this traditional economy is just weak enough.”

But should inflation stay high, the picture changes.

A rate hike “is far more likely to come from worries that the inflation dynamic just remains sticky,” Garvey said. “Let’s suppose inflation goes to 4%, which it practically is right now, and it falls back down to, let’s say for argument’s sake, 3%, and it gets stuck there. That’s a big problem. That’s where the Fed has to say, ‘Look, we don’t want to hike, the economy is vulnerable, but we have to hike here because we need to get inflation down.’”

Group project. Of course, Kevin Warsh isn’t actually an oracle making proclamations. Rate-cut decisions are group projects, and anyone who dissected a pig’s heart with a particularly squeamish lab partner could tell you how those tend to go.

While Warsh has been commended by former colleagues for his people skills, for now, it’s still early days with a new crew, Derek Tang, an economist at MPA Macro who forecasts Fed policy developments, pointed out. “Everyone is feeling each other out, both internally at the Fed and between the Fed and the market, and Congress and the White House to figure out how this new Warsh Fed is going to operate,” Tang told CFO Brew.

What will be “crucial” in the next few months “is to what extent the FOMC becomes Kevin Warsh’s FOMC,” Garvey added.

Some FOMC members will be dovish; some hawkish. That’s normal, Garvey stresses, but “Warsh needs to be leading that majority view, and if that’s the case, then I think we have a perfectly functioning FOMC with Kevin Warsh in charge. What you don’t want is for Kevin Warsh to want one thing, and the rest of the committee to want another thing.”

Wait and see. So, what’s a CFO to do while she waits for those crazy kids at the FOMC to figure out their interpersonal dynamics? For now, there’s going to be more wait-and-see involved.

“Ultimately, Fed policymakers might come into the meeting with their worldview about how the economy is doing and how to respond to it, but ultimately, a lot of it depends on the hard data that we see,” Tang said.

“When it comes to the Fed…at the moment we are going through an exceptionally strong primary market,” Garvey said.

Since the Fed left rates unchanged, it also “leaves corporate America with a very similar funding environment to what they had...and that’s absolutely fine,” Garvey said.