The FOMC released its latest statement on monetary policy.  This was the first meeting and statement issued with Kevin Warsh as the new Fed chair.  The Fed will maintain its target range for the federal funds rate at 3.5 to 3.75 percent.

There were a few notable things with this policy statement.  First, it was extremely short.  If you look at this FOMC statement compared to previous ones, it is quite brief.  There are about 6 meaningful sentences in the entire statement, and even “meaningful” is up for debate.

Also notable was the vote itself.  The statement was approved by a 12 – 0 vote.  Compare that to the previous statement in late April when there were 4 dissenting votes for various reasons.

The statement did acknowledge elevated inflation (price inflation).  It stated: “Inflation remains elevated relative to the Committee’s 2 percent goal, in part reflecting supply shocks that have driven price increases in certain sectors, including energy.  The Committee will deliver price stability.”

The first part is mostly correct, but we shouldn’t discount the fact that price inflation was above 2% even before the war against Iran started.  Whether or not the Committee will deliver price stability remains to be seen.  But given the Fed’s track record, it doesn’t look good.

They consider price stability to mean that your dollars are being devalued by 2% per year.  It isn’t the normal person’s definition meaning that prices don’t change much at all.

Warsh Independence?

The rate announcement was not surprising.  There is almost no way the Fed was going to lower rates with price inflation having spiked higher in the last couple of months.

Also, Kevin Warsh probably feels the need to demonstrate his independence, or at least an appearance of some independence.  He doesn’t want to be referred to as Trump’s puppet.

Aside from the economic pain ahead, it will be entertaining to watch how Trump handles these Fed decisions. If price inflation remains above 2% and the Fed doesn’t lower rates any time soon, you have to wonder if Trump will start attacking Warsh the way he attacked Powell.

Trump was highly critical of Jerome Powell for not lowering interest rates fast enough or aggressive enough.  Trump called him “Too Late Powell”, among other things.

Imagine if Powell had done what Trump claimed he wanted.  With the tariffs, the war, and the skyrocketing debt, you can just imagine where the CPI numbers would be now.  We might be looking at 6% or higher annual price inflation.  If anything, Powell was too dovish from a conventional standpoint and shouldn’t have been lowering rates as aggressively as he was when price inflation was still above the supposed 2% target.

We’ll see if Warsh is independent.  My best bet is that he will be somewhat independent from Trump, but he won’t be independent from the financial establishment.  In some ways, the Fed chair isn’t as powerful as one might think because the Fed chair is often just doing what the market expects.

The Balance Sheet

While most everyone focuses on “rates”, meaning the federal funds rate, the actual money supply does not get that much attention.

The Implementation Note with the FOMC statement indicates that the Fed will continue to engage in monetary inflation as needed (wanted).

If you look at the Fed’s balance sheet, they were in deflationary mode for about three years (2022 to 2025).  Since late 2025, the Fed is gradually starting to expand again.

The balance sheet is still vastly higher than it was at the start of 2020.  The Fed is now resuming its trajectory higher in a far less dramatic way.  This is not surprising given that the national debt will soon top $40 trillion.  It makes you wonder how the Fed can ever stop buying U.S. Treasury securities at this point.

Since 1913, the default mode has generally been inflation.  This is why the dollar has lost about 98% of its value during that time.  Ultimately, the only answer the Fed has to “fixing” the economy is to create more money out of thin air.  It will almost always try to kick the can down the road a little farther.

Best of luck to Kevin Warsh.  He won’t be in an enviable position if we see a recession coupled with continued price inflation above 2%.  He will also have to deal with the unpredictability of Donald Trump on top of it.  Imagine if Paul Volcker had had to deal with a president calling him a loser.

Prepare for more monetary inflation and price inflation.  It is the only political answer the Fed has to all of the political and economic problems.