Fed Frets About Inflation as Kevin Warsh Prepares To Take Over

Concerns about inflation increased last month among members of the Federal Reserve's rate-setting board, as Jerome Powell presided over his final meeting as Fed chair.

Inflation worries dominated discussion during the April 28-29 meeting of the Federal Open Market Committee, newly released minutes show. Powell joined the 8-4 majority in favor of leaving the federal funds rate unchanged at the range of 3.50% to 3.75%.

The minutes show that FOMC members weighed the impacts of the Iran war in recent months. It sent oil prices soaring, raising gas prices and increasing transportation costs for U.S. consumers.

"In addition to energy price increases, several participants noted that supply disruptions associated with the conflict in the Middle East had caused prices for fertilizer and some other non-energy commodities to rise," the minutes state.

Policymakers' growing concerns about inflation will complicate matters for Kevin Warsh, who is President Donald Trump's nominee to replace Powell as Fed chair. Warsh, like Trump, has argued for lower interest rates, but the inflation picture may make it difficult to persuade the FOMC to cut.

Warsh will be sworn in in a White House ceremony on Friday, replacing Powell as chair. Powell opted to remain on the Fed's board of governors, so Warsh will take the seat of Fed Gov. Stephan Miran, who was filling in an expired term.

Inflation worries grow

Several FOMC members noted at the last meeting that inflation remains uncomfortably high for core goods, which they attributed at least in part to tariffs, the minutes show.

And almost all of them were worried about the economic impact if the conflict in the Middle East continues for an extended period. Even after that conflict ends, they worry that oil prices will remain elevated. That price increase could also drive up the costs of consumer goods, which become more expensive to transport amid higher gas prices.

As a result, the board "noted an increased risk that inflation would take longer to return to the Committee’s 2% objective than they had previously expected."

Three members, Beth M. Hammack, Neel Kashkari, and Lorie K. Logan, objected to a statement the Fed later released suggesting an "easing bias" in future interest rate decisions.

In other words, the trio did not agree with the language that suggested the Fed's next move would be a rate cut. Instead, they favored saying that a rate hike might be equally likely, depending on the course of the economy.

Only Miran disagreed with the rest of the panel on interest rate policy, seeking a quarter-point cut.

Trump told reporters he'd take a hands-off approach to the Fed, even as Democrats opposed to Warsh's nomination worried he was too close to the president.

"I'm going to let him do what he wants to do,” Trump said of Warsh, who's been supportive of lowering rates. “He's a very talented guy, he's going to be fine, he's going to do a good job."

Fears and forecasting

Realtor.com® senior economist Jake Krimmel says the minutes show the Fed mostly has a consensus in worrying about inflation. That's brought worries of "inflation contagion," where what started as higher energy prices translates to higher costs all around.

"The Fed's ultimate fear is a spiral of higher expected prices in the future actually begetting higher prices right now," Krimmel says.

What's more, mortgage rates are 35 basis points higher than they were just three months ago. Even if that's lower than this time last year, consumers don't like the shock.

"Inflation is now running higher than wage growth, so homebuyers are losing real purchasing power with each coming CPI readout," Krimmel says. "That's an unexpected and unwelcome shock to housing demand and affordability when it seemed like everything was headed in the right direction just 11 weeks ago."