RPT - ROI-Fed patience risks shredding credibility: McGeever

Spotify Technology

28/07/2026 24:30

The opinions expressed here are those of the author, a columnist for Reuters.
By Jamie McGeever
ORLANDO, Florida, July 27 (Reuters) - If the Federal Reserve wants to get inflation back down to target, it will almost certainly have to raise interest rates. But that doesn't mean it will, creating a major threat to its credibility.
There are legitimate reasons why new Fed Chair Kevin Warsh will want to sit tight this week. The labor market is in a peculiar place right now with low unemployment but weak job creation, while the inflationary outlook is complicated by an energy shock that could escalate if the U.S.-Iran war continues or quickly dissipate if the conflict subsides. 
Pulling the trigger without clearly signaling beforehand might also create some unwelcome market volatility. Markets are pricing only a one-in-three chance of a move on Wednesday, so a "hawkish hold" remains the market's base case scenario.
But time is not on Warsh's side. He is constrained by inflation being above target for more than five years, his own words, and lingering concerns about Fed independence.
When President Donald Trump was selecting the new Fed chief to replace Jerome Powell, he made it clear that lower interest rates were his preference. Warsh has worked extra hard to burnish his inflation-fighting credentials since taking over the hot seat two months ago, insisting repeatedly that achieving price stability is his priority. 
At his first post-meeting press conference as Fed chair last month, Warsh told reporters that the Fed's commitment to meeting its 2% inflation goal is "strong, unanimous, and unambiguous." Testifying to lawmakers two weeks ago, he said those 63 continuous months of above-target inflation have been a tax on the American people and businesses that his Fed will remove. "That means we need a regime change in policy, and we need new consideration of practices."  
If he is to be taken at his word, then the Fed should probably raise rates on Wednesday, given where inflation is, how price pressures are building, and where bond yields are pointing. After all, Warsh's decision to remove "forward guidance" means all policy meetings are, in theory, "live" meetings. 
Yet the central bank is likely to stay on pause this week – and that raises questions about Fed credibility.
     
     
‘MAGICAL THINKING’
Warsh has one thing going for him: he’s new in this job. This should give him a modest honeymoon period before the credibility chatter really increases. But he can talk tough on inflation without acting only for so long.
“Credibility is more an issue if you don’t hike than if you hike. Talk is cheap,” says Joe Lavorgna, chief U.S. economist at SMBC Group and a former Trump Treasury official. 
Economists at Bank of America agree. They argue that if the Fed stands pat on Wednesday, markets could completely remove current tightening expectations – some 60 basis points over the next year – from the implied rate path. A hold on Wednesday that triggers such a dramatic repricing would essentially be equivalent to easing. What would it say about Warsh's credibility if the Fed delivers such a dovish surprise this week, they ask?
The Fed's own median inflation forecasts in last month's staff economic projections (SEP) - which Warsh doesn't put much stock in - show inflation isn't expected to return to target until 2028 at the earliest. To achieve that, tighter policy will be required compared to what officials had envisaged only three months earlier. The 50 basis points of easing embedded in the March SEP was removed in June, reflecting the supposed cooling of the energy shock following the announcement of the U.S.-Iran interim peace deal in April.
However, since then, the Middle East conflict has reignited, and oil prices rose as much as 40% from the July 2 low. This week's letdown in tensions appears to be more of a pause than a genuine sign that a lasting resolution is imminent.
Rates futures might not be flashing red, but the bond market is sending a clear signal that the Fed should respond. The spread between the two-year Treasury yield and the fed funds policy rate has expanded to 70 basis points, the widest since November 2022. 
Lavorgna of SMBC Group says it's "magical thinking" to believe inflation will get back down to 2% without tightening by the Fed. He notes that there have only been six instances in the last 70 years where core inflation has fallen by 0.9 percentage points or more from one year to the next, and in every period, the Fed was tightening.
Lavorgna's line echoes an instantly memorable quote from Fed governor Christopher Waller earlier this month: "Sternly staring at inflation until it melts before our withering gaze is not an option." 
It could be argued that the Fed has been staring at inflation for three years, as its last rate hike was in July 2023. If Warsh wants to restore the Fed's inflation-fighting credibility, encouraging his colleagues to vote for a hike on Wednesday would be a good start.
     
(The opinions expressed here are those of the author, a columnist for Reuters)
Enjoying this column? Check out Reuters Open Interest (ROI), your essential new source for global financial commentary. Follow ROI on LinkedIn, and X.
And listen to the Morning Bid daily podcast on Apple, Spotify, or the Reuters app. Subscribe to hear Reuters journalists discuss the biggest news in markets and finance seven days a week.

U.S. core inflation divergence - PCE vs CPI https://fingfx.thomsonreuters.com/gfx/mkt/zjvqgnemjvx/CPI2.png
(By Jamie McGeever
Editing by Chizu Nomiyama )
((jamie.mcgeever@thomsonreuters.com; Reuters Messaging: jamie.mcgeever.reuters.com@reuters.net/))