T. Rowe Price has argued the new US Federal Reserve (Fed) chair Kevin Warsh’s reform agenda could fuel higher rate volatility.
Since succeeding previous Fed chair Jerome Powell less than two months ago, Warsh has repeatedly indicated a preference for less forward guidance and a more limited public commentary on the wider economy.
In a recent note, the firm’s chief US economist, Blerina Uruci, said Warsh’s messaging since taking over in May has been “succinct” and “hawkish” in tone, a shift that she believes could drive greater rate volatility in the future.
“Since Warsh started his tenure as Fed chair, the main change has been a clear shift in his style of communication (less forward guidance), which all else will set the tone for more rate volatility than we are used to,” Uruci said.
Warsh was nominated to the position by US President Donald Trump, who has consistently called for lower interest rates and has criticised Powell for resisting rate cuts.
With Warsh viewed as being more closely aligned with the US President than Powell, analysts told Investor Daily in May that convincing markets of his independence would be the new chair’s first challenge.
Uruci’s comments follow the latest Federal Open Market Committee (FOMC) meeting on 17 June, Warsh’s first as chair, which saw rates held steady at 3.5 to 3.75 per cent.
The meeting minutes were released this week, showing that Fed officials were divided over the outlook for rates as Warsh characterised the disagreement as a “family fight”.
Also at the June news conference, Warsh outlined five task forces aimed at addressing individual topics, including communication, balance sheet policy, data, productivity and jobs, and inflation frameworks.
The minutes stated the creation of the groups, noting that “some participants commented that they welcomed the opportunity to review the Committee’s communications tools and practices”, with more information to follow in the coming weeks.
Uruci said the taskforce workstreams are expected to drive changes across the Fed functions, and argued the implementation of their conclusions could further add to volatility.
As well as this, she said the announcement that Warsh will lead a “data dependent” committee would “likely make it easier for him to control the FOMC narrative and to build consensus on meeting-by-meeting decisions.”
Warsh’s only public appearance since then was at a European Central Bank (ECB) forum in Portugal last week. At the event, he said he would stick firmly to the US central bank’s 2 per cent inflation target, while reiterating his intention of less forward guidance on monetary policy.
Despite this, Uruci noted that Warsh did mention that inflation risks had decreased since the June FOMC meeting as oil prices and market measures of inflation expectations have both come down.
“He also talked about the AI boom increasing demand and foresees it eventually coming to the supply side.
“While he was hesitant to explicitly describe whether AI was inflationary or not, he did talk about structural productivity and higher potential growth, which aligns with some of his previous remarks from last year about the supply side of the economy,” she elaborated.
Uruci said these comments show a “hint of dovishness” compared to Warsh’s posture at the June FOMC press conference.
US jobs data
The comments from T. Rowe Price also followed the latest US jobs data, which found the country’s unemployment rate dropped slightly to 4.2 per cent in June, while employers added just 57,000 new jobs — falling short of expectations.
Meanwhile, since February, the Iran war has rapidly pushed up inflation in the US to reach a three-year high of 4.2 per cent in May.
Despite the “softer than expected” jobs report, Uruci said the three-month moving average of 111,000 jobs added supports T. Rowe’s thesis that the labour market troughed last year.
At the same time, she added that it is “worth noting” the big decline in labour force participation of prime age workers in June, which kept the unemployment rate flat despite the fall in household jobs.
“The large swing in this series makes me suspicious of its accuracy. The Fed focuses on the unemployment rate (which is the ratio of unemployed and labor supply), and its stability in recent quarters is still the main signal.”
Uruci concluded that although the labour market is “finely balanced”, the pace of job creation has not been as weak as some feared last year.
