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.
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