Fed Policymakers Show Support for Hikes06/18 06:13

   

   WASHINGTON (AP) -- The Federal Reserve kept its key rate unchanged Wednesday 
yet almost half the central bank's policymakers said they could support a rate 
hike later this year.

   The unexpectedly aggressive tilt toward higher rates would disappoint 
President Trump and suggests heightened concerns about persistent inflation 
among Fed officials.

   In an unusually short statement after their two-day meeting, the officials 
dropped language that had suggested their next move would be to cut the key 
rate. The brief statement reflects the influence of new chair Kevin Warsh, who 
was appointed by Trump. Warsh has previously criticized the Fed for commenting 
too broadly on the economy.

   Still, Warsh's 18 colleagues on the Fed's rate-setting committee sent a 
clear message in a set of quarterly projections released Wednesday: Nine 
signaled they supported higher rates this year, with six of those supporting 
two or more quarter-point increases.

   It's a sharp change from March, when no policymakers penciled in a hike and 
the committee as a whole forecast one cut in 2026. The change is an 
acknowledgement that inflation is at its highest level in three years and many 
officials have said in recent speeches that if inflation doesn't decline, 
higher rates may be necessary in the coming months.

   Warsh, in his first news conference as chair, also underscored the Fed's 
determination to bring inflation down to the central bank's 2% target, 
suggesting he will take a hawkish approach as chair. "Hawks" typically support 
higher rates to quell inflation, while "doves" often support lower rates to 
boost hiring.

   "We've missed (on inflation) for five years and we're going to fix that," he 
said. "When we deliver on our price stability objectives, which we will, the 
American people will feel as though the hardships that they've been living 
through ... are in the rear view mirror."

   Warsh had supported rate cuts last year while under consideration to be 
Trump's pick as Fed chair to replace Jerome Powell. Since returning to the 
White House last year, Trump repeatedly attacked Powell for not cutting rates 
more deeply.

   Warsh did not hint whether he was leaning toward hiking rates, but 
economists saw his message at the press conference as hawkish.

   "The risk that they might need to raise rates has clearly risen given what 
we got today," Matthew Luzzetti, chief U.S. economist at Deutsche Bank, said.

   Financial markets agreed. Stock prices fell sharply after the Fed issued its 
statement and Warsh spoke. Bond yields rose.

   Trump, for his part, appeared to accept the Fed's decision.

   "We have a very good guy over there now so I'm guided by what he wants to 
do," Trump said in France, where he attended a meeting of leaders from the 
world's seven largest economies.

   All told, another eight officials signaled they would support keeping the 
rate unchanged, and one penciled in a cut. Warsh did not submit a forecast for 
how the Fed might change its key rate.

   In another shift, the Fed's post-meeting statement contained no hints about 
its next moves, or what economists refer to as "forward guidance." Previous Fed 
chairs, starting with Ben Bernanke, saw such guidance as a benefit to the Fed, 
because it prodded financial markets to move rates either higher or lower, 
depending on what the Fed preferred.

   Warsh told reporters at a press conference that guidance was not "well 
suited to the current policy conjuncture." He has previously criticized forward 
guidance, as well as the quarterly projections, for potentially locking the Fed 
into a specific rate path.

   Warsh also said he is forming five task forces to examine such areas as how 
the Fed communicates, the sources of data it uses in making policy decisions, 
and the frameworks it uses to evaluate inflation, all with the goal of making 
sure the Fed is "clear-eyed and focused on the future."

   Diane Swonk, chief economist at accounting firm KPMG, said the use of the 
task forces indicates Warsh is not looking to impose changes on the rest of the 
Fed, but instead is seeking consensus.

   "He wants buy in," she said. "He's not trying to change it by command."

   If the Iran war is resolved, gas prices will likely continue to decline and 
inflation may cool in the coming months. But prices of many goods and services 
-- such as clothes, dental care, and child care -- were rising before the Iran 
war, and inflation has been above the Fed's 2% target for five years, 
suggesting that there may still be inflationary pressures in the economy.

   Warsh also faces a sharply different economic environment than when he 
appeared to campaign for the job of Fed chair last year. Back then, he was 
outspoken in favor of lower interest rates, as Trump has demanded. He pointed 
to the development of AI as a technology that could vastly expand the economy's 
ability to produce goods and services cheaply, which would over time bring down 
inflation.

   Even then, many economists were skeptical of his claim. At least in the 
short run, analysts note that soaring investment in semiconductors and 
computing equipment is contributing to higher inflation.

   Indeed, since the Iran war began Feb. 28, inflation has accelerated to a 
three-year high of 4.2%, lifted mostly by costlier gas stemming from the Iran 
war. The Fed typically fights higher inflation by raising its key interest rate 
to cool spending and growth.

   Trump has announced a peace agreement that could bring the three-month 
conflict to an end, but it's not clear if peace will hold. And even if oil 
flows freely out of the Middle East again, it could take months for prices of 
gas, groceries, and items such as airline fares, to cool.

   At the same time, hiring has picked up in recent months, removing a key 
rationale for cutting rates. In January, the Fed forecast that it would reduce 
rates twice this year, as part of its quarterly economic projections. A big 
reason for those potential cuts is that employers were shedding jobs and 
policymakers worried that the unemployment rate would rise. The central bank 
typically cuts its key rate to spur economic growth and hiring.

   But earlier this month a government report showed that hiring jumped in May, 
when employers added 172,000 jobs, the third straight month of solid job gains.