The July vote was 9-3 to hold, so count the seats before you count on a hike

Jerome Powell may no longer be Fed chief, but he still has a say in interest policy, with one vote - just like current Fed Chairman Kevin Warsh.

Jerome Powell is no longer chairman of the Federal Reserve. But he is still a governor, he still sits on the Federal Open Market Committee, and when Kevin Warsh polls the 12 members of that committee on Sept. 16, Powell will have exactly one vote.

That happens to be exactly the same number as Warsh has.

This would merely be awkward if Warsh had not gone to Jackson Hole, where the world's monetary authorities gather in fleece vests to explain scarcity, and on Friday used the hardest passage in his first address at the symposium as Fed chairman to put responsibility for 65 months of sustained, elevated inflation squarely on the central bank.

Count backward and you land in March 2021, when Powell was running the place.

Warsh did not say Powell personally caused five years of inflation. He did something more careful and, in Washington, considerably more lethal. He blamed the institution Powell chaired through almost all of that period.

Powell still gets to vote on what happens next.

Powell lost the chairmanship, not the vote

Wall Street has decided September has become much more interesting. On CME's fed-funds futures, the implied probability of a September rate hike jumped from about 35% before Warsh's speech to roughly 60% after it, while short-term Treasury yields rose and the dollar strengthened. Prediction markets were less impressed. Kalshi had the chances of a hike at 47%.

Before you count basis points, count votes.

At the July meeting, the FOMC voted 9-3 to hold rates at 3.50% to 3.75%. Beth Hammack, Neel Kashkari and Lorie Logan wanted a quarter-point increase. Warsh and Powell were both among the nine who voted to hold.

Warsh changed the argument Friday. He did not cast September's vote three weeks early.

That distinction seems obvious, which is why financial markets occasionally require several trillion dollars to discover it.

Hundreds of economists. The last step is still counting to seven.

A rate increase requires seven of 12 votes. There are three demonstrated votes in favor, because three people voted for a rate increase in July.

Lisa Cook says inflation remains too high and that she is prepared to act by raising rates if necessary. She is also the one member whose seat is being litigated. The Supreme Court blocked her removal in June, and the White House restarted the process in August. So one is in court.

Christopher Waller has left the door open to a hike while warning about the timing problem in tightening into an oil shock. The price effect may dissipate soon, in which case higher rates will start to bite only after inflation has already begun coming down.

Anna Paulson has similarly kept an open mind about whether higher rates will become necessary, though she also called her July vote to hold "not a close call" and reads underlying inflation at 2.4% to 2.8%. That is the central bank equivalent of telling your children "we'll see," which children correctly understand to mean the evidence has not yet been submitted.

Four important reports will arrive before the vote. They are not supporting actors in this drama.

They are the plot.

The Fed goes silent just when the numbers start yelling

The August employment report arrives Sept. 4. The Fed's blackout period begins Sept. 5, silencing policymakers until the day after the meeting ends.

The Labor Department then gives us producer prices on Sept. 10, consumer prices on Sept. 11, and import and export prices at 8:30 a.m. Eastern time on Sept. 16. Five and a half hours later, at 2 p.m., the FOMC's statement and the new projections arrive together.

One lands before the silence. Three land while the people setting the price of money are forbidden to discuss them.

Then comes the bureaucratic masterpiece.

The Fed's preferred inflation measure is personal consumption expenditures. The latest reading has headline PCE at 3.7% and core PCE at 3.3%, and Warsh built much of Friday's speech around that measurement. Core PCE strips out food and energy, which are the two things Americans buy without first holding a meeting about it.

August PCE arrives on Sept. 30.

Two weeks after the vote.

The Fed calls this being data dependent, a phrase with the cadence of a discipline and the function of an alibi.

Fewer prices are misbehaving. They are just working overtime.

In Warsh's breakdown of the 199 PCE components, 54% were rising faster than 3% over 12 months, down from a postpandemic peak of 77% and far above the 32% that once counted as normal. Over six months, the share falls to 49%, even as the six-month change in overall PCE runs at 4.1%.

Hotter, but narrower.

That matters because Mark Blyth and Nicolò Fraccaroli make a useful argument in their book "Inflation: A Guide for Users and Losers." Inflation is an outcome. It is not necessarily a diagnosis.

Too much demand chasing too little supply can cause it. So can tariffs, an oil shock, broken supply chains, or enough temporary disasters in a row that "temporary" qualifies for Social Security.

Government reduces all of them to a percentage.

The percentage does not come with fingerprints.

The Fed has a hammer. Hormuz did not volunteer to be the nail.

Part of the inflation problem sits in the Strait of Hormuz. Six months of conflict with Iran have pushed crude oil prices up more than 20%, and Warsh specifically flagged rising commodity prices as something requiring attention.

Warsh can raise the federal-funds rate to 5% and not one additional barrel of oil leaves Iran. At 6%, the shipping insurers do not lower their rates. At 7%, the Revolutionary Guard does not call Washington to announce that the Taylor Rule has changed its mind.

Interest rates cannot cure the original supply shock.

If higher energy prices spread into freight, wages, services and expectations, an oil problem becomes a general inflation problem. The Fed cannot manufacture the missing supply, so it suppresses demand everywhere it can reach.

This is roughly equivalent to stopping an overflowing bathtub by shutting off the water to the entire apartment building because you cannot get to the faucet. It works. Everybody upstairs would still like a word.

The last geniuses who understood money perfectly broke the world

Liaquat Ahamed's "Lords of Finance: The Bankers Who Broke the World" won the 2010 Pulitzer Prize for history. He was not a historian. He spent 25 years managing money.

His central bankers were not fools either. They were credentialed men running a monetary system they were certain they understood.

They were also disastrously wrong.

That is more frightening than stupidity, which can at least be kept out of the meeting.

The Fed has a printing press. Banks have keyboards. Guess who makes more.

Brendan Greeley's "The Almighty Dollar," published in May, highlights another complication.

His 500-year history argues that America neither invented the dollar nor has ever fully controlled it. Banks create deposits when they lend, markets create credit, and institutions well outside the U.S. manufacture dollar claims nowhere near the Fed's balance sheet.

Warsh's speech makes the point in real time. Large corporations still enjoy narrow spreads and easy issuance. Housing, agriculture, small business and commercial real estate face something considerably tighter.

Same country. Same Fed. Same policy rate.

Different price of money.

The vote is 9-3 until the data move somebody

The September meeting is being sold as a referendum on whether Kevin Warsh has become a hawk.

That misses the better story.

We know Warsh thinks inflation has run too high for too long and that the central bank owns the failure. We also know he voted to hold in July.

Start with the labor market, which is not cooperating with the hawks. July payrolls fell by 23,000, May and June were revised down, and unemployment still ticked lower, to 4.1%. Warsh's answer is that when labor-supply growth is near zero, weak prints are consistent with full employment. Sept. 4 tells us whether that is analysis or alibi.

If the August report holds up on Warsh's terms and the inflation reports show price pressure broadening beyond energy, the three July dissenters will have company. Warsh could move. Cook could move. The people parked somewhere between "hold" and "convince me" become the entire meeting.

If payrolls turn genuinely ugly while inflation stays hotter but narrower and energy prices retreat, the July majority has an easier case for sitting still.

That is why Wall Street's 60% is interesting rather than dispositive. The market has assigned confident odds to votes that will be cast after four numbers nobody has seen.

Powell will see those numbers too.

He no longer runs the meeting. He still has a seat, a vote, and the unusual privilege of listening to his successor blame the institution he ran for five years of inflation.

Warsh inherited Powell's inflation problem. He did not inherit Powell's vote.

Welcome to September.

Charlie Garcia is founder and a managing partner of R360, a peer-to-peer organization for individuals and families with a net worth of $100 million or more. His Capital Mischief Substack covers financial markets and geopolitics. Follow him on X here.

-Charlie Garcia