Kevin Warsh wanted a family fight at the Fed. Oil has provided the spark

By Ann Saphir and Howard Schneider

April 30 (Reuters) – Kevin Warsh says he wants a vigorous family fight about monetary policy at the U.S. Federal Reserve when he takes over as chair. It broke out before he arrived.

“Welcome to the new Fed era of dissent,” Navy Federal Credit Union Chief Economist Heather Long said after four of the Fed’s 12 voters dissented against the latest policy statement, the largest set of defections since 1992.

Though three of the group supported the decision to hold the interest rate steady, they objected to language in the Fed’s policy statement they felt did not take adequate account of developing inflation risks that might require a rate hike.

Their concerns were underscored through the day and overnight when benchmark global oil prices spiked to $126 a barrel amid a continued standoff between the U.S. and Iran over the closure of the strategic Strait of Hormuz shipping channel that has slowed Middle East oil exports and choked supplies of other industrial goods around the world.

That was the highest oil price since March 2022 after the Russian invasion of Ukraine, which came amid a surge in U.S. inflation to a 40-year high that reshaped the political discourse heading into the 2024 presidential election.

Key U.S. prices are again climbing, with gas hitting $4.30 a gallon on average according to data collected by the American Automobile Association, also the highest since that spring of 2022, when the price hit $5.

Oil prices eased Thursday morning but the volatility and other data showed the dilemma Warsh inherits.

The economy continued expanding in the first months of the year, growing at a 2% annual rate in the first quarter with continued business investment and consumer spending. But overall inflation by the Fed’s preferred Personal Consumption Expenditures price index was 3.5% in March, well beyond the central bank’s 2% target, while underlying or “core” prices that exclude the impact of commodity-based food and energy costs, rose at a 3.2% pace versus 3% in February.

“The war in Iran has made the Fed’s job incredibly complex and there’s a wide range of views of what to do next,” Long said on Wednesday. “For now, the Fed is on hold, but good luck to new Fed Chair Kevin Warsh trying to get agreement going forward.”

Deciding how to process the oil shock in setting Fed policy will be among Warsh’s early challenges as he takes over for outgoing Fed Chair Jerome Powell, whose term leading the central bank ends on May 15. Warsh’s nomination cleared a key hurdle in the Senate on Wednesday and he is expected to oversee the Fed’s next policy meeting on June 16-17.

The cost of energy “hasn’t even peaked yet,” Powell, who is remaining in his role as a Fed governor, said at his final press conference as chair on Wednesday. “I think we want to see the backside of that and progress on tariffs before we even think about reducing rates.”

Fed policymakers think the Trump administration’s tariffs are also lifting inflation, though they expect the impact to fade in coming months.

‘REGIME CHANGE’

Promising “regime change” at the Fed, Warsh told lawmakers at his confirmation hearing last week that he feels the Fed is too stuck in its set ways and he’d like to shake it up a little.

“I tend to favor messier meetings than some, where people don’t show up with rehearsed scripts,” Warsh said. “If the central bank has that good family fight, I think that they’re going to make better decisions, and if they happen to make mistakes, they’ll correct them sooner.”

At Wednesday’s meeting, Fed policymakers had what Powell called a “vigorous discussion” over whether to change the Fed’s post-meeting statement to signal the central bank’s next move could be a rate hike, removing what has been an “easing bias” in the policy statement indicating that any coming move in rates would be lower.

Reserve Bank presidents Beth Hammack of Cleveland, Lorie Logan of Dallas and Neel Kashkari of Minneapolis wanted to move to more neutral language. There were others around the table, Powell said, who could have supported that as well, given the inflationary pressures from rising oil prices from the Iran war.

Fed Governor Stephen Miran dissented in favor of a rate cut as he has at every meeting since joining the Fed last fall.

In the end, the majority decided to keep the Fed’s current guidance leaning towards a possible cut in the future.

“A group of us, including me, didn’t feel like we needed to be in a hurry,” to change the statement, Powell said in his news conference following the meeting, though with more of the Fed’s 19 policymakers moving towards a change in guidance “at a certain point you would move and that conceivably could come as soon as the next meeting.”

WARSH IS NOT A FAN OF ‘FORWARD GUIDANCE’

Pressure from colleagues to shift Fed guidance towards a rate hike could complicate things for Warsh.

President Donald Trump picked Warsh after souring on Powell, whom he has pressured tirelessly to cut rates, and said he expects rates to fall after Warsh takes over. Investors currently don’t expect the Fed to cut rates until at least the end of next year.

Warsh says he hasn’t made any promises. He also says he generally dislikes central bank “forward guidance.”

“I don’t believe that I should be previewing for you what a future decision might be,” he told lawmakers last week.

Crafting the Fed’s post-meeting statement, however, is not up to the chair alone.

“Every new Fed chair has the same situation, which is you’ve got 18 colleagues on the FOMC, 11 of them vote during a year, and your job is to create consensus, is to talk to them, understand them, you know, be inside their thinking and be able to pull them together,” said Powell, who got unanimous support at the vast majority of meetings during his tenure.

“That’s what every Fed chair has to do. And I think Kevin Warsh … has the capabilities and skills to be very good at that.”

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(Reporting by Ann Saphir; Editing by Keith Weir and Andrea Ricci )