Mishkin expects Warsh to hold rates as inflation hits 3-year high

Former Fed Governor Frederic Mishkin expects Chair Kevin Warsh to maintain his hawkish stance, keeping rates elevated as inflation runs at more than double the central bank's target.

Former Federal Reserve Governor Frederic Mishkin said Chair Kevin Warsh will likely hold interest rates at 3.5%-3.75% through the summer, as the Fed's preferred inflation gauge accelerated to a three-year high of 4.1% in May.

"Warsh has made clear he's not going to ease until he sees sustained evidence that inflation is coming down," Mishkin said Wednesday on CNBC's "Squawk on the Street." "The data since his June press conference only reinforces that view."

The personal consumption expenditures index rose 0.4% in May, pushing the annual rate to 4.1% — more than double the Fed's 2% target. Core PCE, which strips out volatile food and energy prices, climbed 3.4% from a year ago, the highest since October 2023. Consumer spending still rose 0.7% alongside a matching gain in personal income, underscoring the resilience that gives policymakers cover to stay restrictive.

The stakes are high for markets pricing in an 80% probability of at least a quarter-point rate hike by year-end, up from 68% a month ago, according to CME Group's FedWatch tool. Warsh has refused to offer forward guidance, telling a European Central Bank forum in Sintra, Portugal, last week that the Fed will "deliver price stability" and that officials will have a "good family fight" at the July 28-29 meeting.

Warsh Doubles Down on Hawkish Message

Warsh used his Sintra appearance to reinforce the hawkish tone that surprised markets at his June 17 press conference. He said the Fed is "going to be an independent central bank at this moment" when asked about President Trump's preference for lower rates, and noted that inflation expectations over the first four months of his tenure have fallen. Yet the data has moved against him: Fed officials' median projection now sees core PCE ending 2026 at 3.3% and remaining above target through 2028 at 2.1%.

The last time core PCE ran this hot was in late 2023, when the Fed held rates at 5.25%-5.5% for over a year before beginning its cutting cycle. The current fed funds rate of 3.5%-3.75% is already 150 basis points below that peak, limiting Warsh's room to keep policy loose if inflation persists.

Cross-Asset Fallout Intensifies

The dollar has strengthened as rate hike expectations build, pushing spot gold below $4,000 an ounce for a third straight session. Bullion has tumbled more than 24% since the U.S. and Israel launched strikes on Iran on Feb. 28, with a stronger dollar and rising real yields eroding the metal's appeal. The S&P 500 has also felt the pressure, with rate-sensitive sectors like real estate and utilities trailing the broader index.

Mishkin, a Columbia University professor who served as a Fed governor from 2006 to 2008, did not offer a specific forecast for the July meeting. But his assessment aligns with market pricing that shows just a 22.5% probability of a rate hike next month, according to CME FedWatch, with the bulk of tightening expectations concentrated in the final months of 2026.

"If the labor market holds, consumers will have the ability to maintain spending patterns," LPL Financial Chief Economist Jeffrey Roach said in a note after the May PCE release. That resilience, combined with sticky inflation, gives Warsh little reason to signal a pivot anytime soon.

This article is for informational purposes only and does not constitute investment advice.