Counting the votes: Warsh faces a tough battle as the Fed girds for expected interest rate hike

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Federal Reserve Chairman Kevin Warsh faces a tricky head count this week when he and his fellow policymakers decide on both the immediate and future path of interest rates.
While markets have honed in on a near-certain quarter percentage point hike in Wednesday's vote, it's not at all clear how broad will be the margin among the 12 Federal Open Market Committee voters.
Moreover, Warsh will have to decide how to message the move: Will this be the rare one-and-done on hikes, will there be more to come or will the chair maintain his cryptic posture in not trying to guide markets one way or the other?
"With the market priced this way, it would be shocking if he came in and did nothing," Bill Dudley, the former New York Fed president, said in a CNBC interview. "It would really damage his credibility because it would basically be all talk, no action."
Indeed, as of Monday afternoon, futures traders were pricing in a better than 92% probability of a rate increase this week, as well as a more than 75% chance that the FOMC would follow up in December with another move, according to the CME Group's FedWatch gauge. Fed funds, the benchmark overnight borrowing rate, currently stand at 3.50% to 3.75%.
The greater probabilities follow another run-up in fuel prices and inflation data last week that showed prices continued to climb in August. Both trends followed Warsh's comments a few weeks ago that the Fed would be forced into action unless there are more concrete signs that inflation is easing back to the central bank's 2% target.
However, there are substantial complications.
Wait or act?
For one thing, the Fed historically has looked through the type of trends that are fueling inflation now. Economists generally agree that much of this year's increase has come from tariffs and an energy supply shock from the Iran war, both of which have uncertain impacts on the long-range trajectory of inflation.
"We do not see a strong economic case for raising the funds rate," Goldman Sachs economist David Mericle said in a client note. "We think that all of the overshoot of 2% can be attributed to one-time factors whose impact is likely to fade."
Nevertheless, Goldman changed its call from no change at this week's meeting to a hike, primarily because the firm's economists think the market expectations will force the Fed to move.
Whether that also will be the case on an FOMC that voted 9-3 in favor of a hold at the July meeting is another matter.
The three dissenters — regional presidents Lorie Logan of Dallas, Beth Hammack of Cleveland and Neel Kashkari of Minneapolis — all supported a quarter-point hike two months ago, when the Fed last met. Assuming their positions haven't changed, and there's been nothing in their public comments to suggest they have, that would mean four other members would have to switch their votes from hold to hike.
Arguably the most-watched voter is Governor Christopher Waller.
In public remarks delivered Sept. 3, Waller voiced support for another hold at this meeting, albeit with the usual caveats about watching data to confirm that disinflation trends are continuing. Mostly, he merely urged patience rather than a rush to hike.
"What's the cost of waiting one meeting? Hiking 25 basis points, one meeting right now, is not going to bring the [consumer price index] down to 2%," he said.
The CPI for August actually showed headline inflation running at a 3.4% rate, though the core rate, which excludes food and soaring energy costs, was a more benign 2.4%, down 0.1 percentage point from July.
Waller wasn't alone in advocating patience — New York Fed President John Williams told CNBC less than two weeks ago that a "wait-and-see" approach seems to make sense. Earlier in the summer, Williams, whose perch atop the New York Fed is traditionally considered part of the influential "troika" of influence at the central bank, said he thinks inflation has peaked.
Also in recent remarks, Governor Michael Barr expressed concern about temporary inflation taking deeper hold and said he would be open to a hike, not set on one.
The FOMC breakdown
So who would join the three July dissenters?
Warsh is largely expected to be part of the hiking group, considering his remarks in Jackson Hole, Wyoming last month. Governor Lisa Cook said in early August that she's "prepared to act" to take on inflation. Conversely, Philadelphia Fed President Anna Paulson and Chicago's Austan Goolsbee also have counseled a more patient approach.
That would leave Governors Philip Jefferson, who is the vice chair; Jerome Powell, the former chair, who has kept a decidedly low profile since stepping down from the top spot, and Michelle Bowman, who spoke little on monetary policy over the summer and whose last related remarks were in May, when she also expressed concern about hiking unnecessarily.
Then there's a larger wildcard: Should Warsh press the case for a hike, would those on the fence simply cross over to his side in the interest of presenting a united front?
The vote margin not only will reveal the extent of the intellectual divide on the committee between those who think inflation is temporary and those who believe price pressures are becoming entrenched. It also will provide important signals about how effectively Warsh's leadership is reverberating inside the Fed.
"It should be noted that, if the Fed does indeed raise rates this week, it may not look, in retrospect, like a close call," David Kelly, chief global strategist at JPMorgan Asset Management, said in his weekly market note. "If a majority within the committee coalesces around a decision to hike, the other members may well join them to portray a more united front to the public and the President."
In such a case, Kelly said the final vote could see two, one or no dissents.
From there, markets will look at the Fed's "dot plot" update. The grid spells out, anonymously, the rate expectations for the full 19 participants at the meeting, though Warsh withheld his dot for the June update.
Investors will look for how much conviction there will be for two hikes this year, as well as the outlook for 2027. This will also feature the first look at 2029. The Fed almost never hikes or cuts just once but rather moves in cycles, as policymakers view incremental one-off moves as ineffective.
A 10-8 split in favor of one hike — assuming Warsh's disdain for forward guidance and nonparticipation in the update — would indicate that "some participants might be ambivalent about the first hike and some might want to avoid pushing market expectations any higher," Mericle wrote.
"But we see a risk of a majority for two hikes if more participants than we expect see a hike this week as a normal response to higher oil prices and AI demand and the start of a series of rate hikes," he added.
In the case of a close divide on the committee, attention then will turn to Warsh's news conference Wednesday afternoon, and how the chair conveys FOMC sentiment.
Dudley, the former New York Fed chief, said "the Fed needs to explain how they're thinking about the economy."
"Now [Warsh has] just got to follow that up with action," Dudley said. "If he does that, I think he's basically fixed the problem that he created in his first two press conferences."

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