US Federal Reserve’s direction of travel on interest rates has rarely been this opaque

The outcome of Wednesday’s US Federal Reserve meeting, the second under chairman Kevin Warsh, is one of the most unpredictable in years. Markets, in the main, are expecting the central bank to hold interest rates steady, but some observers say a moderate rate hike in response to spiking oil prices isn’t off the table. The direction of travel has rarely been this opaque. Part of this may be down to Warsh’s preference to end the culture of forward guidance, whereby the central bank signals to markets the probable policy path. The monetary policy chief feels this type of telegraphing boxes the bank in and makes it harder to shift course. Inflation also seems to be at a crossroads. The latest US inflation report for June showed prices fell more than expected, making the case to hold rates steady. At the same time, renewed tensions in the Middle East have pushed oil prices higher again, sparking concern higher prices could get sticky and morph into broad-based inflation. If Warsh and his fellow policymakers opt for a rate hike, they will almost certainly feel the wrath of US president Donald Trump, who appointed Warsh and has been banging the drum for lower rates to boost US growth. In all likelihood, Warsh will probably play for more time. By the time the Fed meets again in September, policymakers will have two more months of data and, presumably, a better read on the economy. If US inflation was being fuelled by an overheating labour market, that’s one thing. But yo-yoing oil prices in response to the US’s war against Iran is a wild card. Trump’s tariff policy, which seems to change week to week, is another unpredictable factor. The US economy has, however, performed relatively well – in headline terms – given the number of incoming shocks. For many that means the focus for Warsh and his colleagues will be keeping a lid on inflation.