Powell keeps one FOMC vote as Warsh's hike odds hit 60%

Powell lost the Fed chairmanship but kept his vote, leaving September's rate call to a committee split over inflation.

Jerome Powell, no longer Fed chairman but still a governor, holds one of the 12 votes Kevin Warsh needs for a September hike, with futures pricing a 60 percent chance of an increase after his Jackson Hole speech.

"Warsh did not say Powell personally caused five years of inflation. He did something more careful and, in Washington, considerably more lethal. He blamed the institution Powell chaired through almost all of that period," Charlie Garcia, founder and managing partner of R360, said.

The implied probability of a September rate hike jumped from about 35 percent before Warsh's speech to roughly 60 percent after it, while short-term Treasury yields rose and the dollar strengthened. Prediction markets were less impressed, with Kalshi putting the chances of a hike at 47 percent. At the July meeting, the Federal Open Market Committee voted 9-3 to hold rates at 3.50 percent to 3.75 percent, with Beth Hammack, Neel Kashkari and Lorie Logan seeking a quarter-point increase.

A rate increase requires seven of 12 votes, and three members have already demonstrated support. The Sept. 16 decision will hinge on four reports landing before the vote — the August employment report on Sept. 4, producer prices on Sept. 10, consumer prices on Sept. 11 and import-export prices on Sept. 16 — with the Fed's blackout period beginning Sept. 5.

The inflation picture Warsh built his case around remains hot but narrowing. Headline personal consumption expenditures ran at 3.7 percent and core PCE at 3.3 percent, with 54 percent of the 199 PCE components rising faster than 3 percent over 12 months — down from a post-pandemic peak of 77 percent but far above the 32 percent that once counted as normal. Over six months, the share falls to 49 percent even as the six-month change in overall PCE runs at 4.1 percent.

Part of the problem sits in the Strait of Hormuz. Six months of conflict with Iran have pushed crude oil prices up more than 20 percent, and Warsh specifically flagged rising commodity prices as requiring attention. Interest rates cannot cure the original supply shock — at 5 percent or 6 percent, no additional barrel of oil leaves Iran and shipping insurers do not lower their rates. If higher energy prices spread into freight, wages, services and expectations, an oil problem becomes a general inflation problem.

The labor market is not cooperating with the hawks. July payrolls fell by 23,000, May and June were revised down, and unemployment still ticked lower to 4.1 percent. Warsh's answer is that when labor-supply growth is near zero, weak prints are consistent with full employment. The Sept. 4 report will test whether that is analysis or alibi.

Seven of 12 votes needed as three dissenters already on record

Lisa Cook says inflation remains too high and is prepared to act by raising rates if necessary, but her seat is being litigated — the Supreme Court blocked her removal in June and the White House restarted the process in August. Christopher Waller has left the door open to a hike while warning about the timing problem of tightening into an oil shock. Anna Paulson has kept an open mind, though she called her July vote to hold "not a close call" and reads underlying inflation at 2.4 percent to 2.8 percent.

If the August report holds up on Warsh's terms and inflation shows price pressure broadening beyond energy, the three July dissenters will have company. If payrolls turn genuinely ugly while inflation stays hotter but narrower and energy prices retreat, the July majority has an easier case for sitting still.

Powell will see those numbers too. He no longer runs the meeting, but he still has a seat, a vote and the unusual privilege of listening to his successor blame the institution he ran for five years of inflation. The last time the Fed faced this kind of internal split over tightening, in the run-up to the 2022 cycle, the committee ultimately moved in the direction of the dissenters within two meetings.

This article is for informational purposes only and does not constitute investment advice.