Federal Reserve Chairman Kevin Warsh faces his biggest audience this week with one question above all hanging over him: Is inflation high because of one-off shocks such as tariffs and a war, or because the economy is simply running too hot?

The question determines whether interest rates will go up. It's also splitting Warsh's colleagues. Three officials voted last month to raise rates, and others have signaled they are open to joining them. Warsh hasn't said where he comes out, part of a new policy of communicating less.

"People are expecting him to make an argument," said Anil Kashyap, a University of Chicago economist. "And until he does, it may be hard to carry a committee."

When Warsh speaks Friday at the Kansas City Fed's annual conference in Jackson Hole, Wyo., investors will be listening for an account of how Warsh reads this economy and what would make him move. So will many of his colleagues in attendance.

Warsh inherited an economy that could be read in two ways with opposite implications for monetary policy. In the first, inflation has been kept above target for more than a year by a series of one-off shocks, such as tariffs and the energy disruption from the Iran war. A central bank need not raise rates in response to such shocks, confident that as they recede, inflation will ease on its own.

In the second, those shocks are masking deeper imbalances: Demand is outstripping supply and letting businesses make price increases stick. That sort of inflation doesn't recede by itself and requires the central bank to act.

Softer price data for the past two months have, for now, eased the pressure to raise rates at the Fed's next meeting in September. But they haven't resolved whether interest rates are restrictive enough to keep inflation headed lower, especially with the Iran war, new tariffs and the AI build-out threatening sustained upward pressure on prices.

Warsh has pledged to remake the Fed based on his belief it has failed in its primary mission of delivering low inflation. Such an agenda rests on a diagnosis of what is keeping inflation high. Inflation fell from around 7% to less than 3%, then ticked up and stalled. It has been above the 2% target for more than five years.

Warsh's colleagues don't agree on whether the Fed's current rate, around 3.6%, is high enough to slow the economy and bring inflation down. The hawkish contingent wants to tighten and points to solid spending, the AI investment boom and healthy demand for labor and loans. This camp says the Fed can no longer credibly claim that it has a plan to squeeze out the last percentage point.

Others point to reasons price pressures could run out of steam. Companies selling to consumers are "quite despondent" about making increases stick, Richmond Fed President Tom Barkin said in an interview last month, describing shoppers who trade down or defer big purchases.

The cost of saying less

When the Fed is divided, someone has to decide, and on close calls that's the chairman. But Warsh has built his chairmanship around not disclosing his view. He has spent a decade arguing that central bankers talk too much, by issuing forecasts that harden into commitments.

The chairman has a few instruments for holding a committee together. If the Fed elects not to raise rates, he can dissuade hawks from dissenting by adding a phrase to the statement that the case for an increase has been building. Warsh didn't try to twist arms last month, and three voted to raise rates, the most in a decade. At Fed meetings, Warsh hasn't given the committee a detailed account of how he reads the economy; some had hoped to hear more substance and fewer catchphrases by now.

Ahead of his first meeting in June, when the FOMC rewrote its policy statement to underscore a commitment to bring inflation down, one official warned that the new language would be read as hawkish, which was fine, so long as the committee was prepared to follow through. Markets took the point: The probability of a rate increase by September jumped.

Warsh's tight-lipped strategy faced a reality check at his second meeting, in July. At a press conference afterward, he didn't directly answer reporters' questions about how the Fed's rate stance would reduce inflation as he promised.

Doubts surfaced about where he would lead the Fed. "If Warsh is bringing to the FOMC the word salad he delivered to market participants today, we very much doubt his colleagues will be convinced to follow his lead," Tim Duy, chief U.S. economist at SGH Macro Advisors, wrote to clients.

As Warsh spoke, short-term bond yields fell but the 30-year Treasury yield hit its highest level since 2007, and the 30-year mortgage rose to around 6.75%, the highest this year. That combination suggested investors thought the Fed might accept a little more inflation now at the risk of having to raise rates later.

Every chairman faces a learning curve, and no one should expect a new leader to turn around an institution in one or two meetings, said Mickey Levy, an economist at the Hoover Institution, where Warsh spent the last 15 years. But he said Warsh eventually needs to say whether current policy is restrictive and how it gets inflation back to 2%: "That's what's missing now, and he'll get there."

Reading the bond market

Warsh suggested the rise in yields before the July meeting meant the market was doing some tightening for him. Warsh argued that by not spoon-feeding markets, the Fed hears from what he called a very accomplished economist-the internals of financial markets.

But that logic assumes markets are only responding to news about the economy rather than policymakers. That was always suspect, since where the Fed will guide short-term rates is a key determinant of yields.

The logic grew trickier last week when Treasury Secretary Scott Bessent announced plans to expand buybacks of longer-term debt. He said economic fundamentals didn't support where the market was setting yields. Bessent has also said inflation isn't the problem the Fed's hawks claim.

The larger challenge for Warsh is diagnosing what his predecessors got wrong. If lowering rates over the last two years to support a labor market that turned out to be sturdier than officials thought was a mistake, the answer is to reverse the cuts now. That would be awkward for Warsh. President Trump and Bessent argued for deeper cuts last year, and Warsh, in the months before he got the job, didn't disagree.

On the other hand, if inflation has been sticky due to tariffs last year and higher energy prices this year, recent misses are bad luck rather than a bad read of the economy. That wouldn't undo Warsh's case for reform, but it could narrow it.

A third possibility, one Warsh has made a version of for years, says that an entirely different approach to inflation is in order. The Fed's models treat rising prices as broad-based, with wages near the center, leaving the central bank to handle inflation shock by shock, deciding which ones to look through. Nothing in that framework tells the Fed what to make of an investment boom that lifts prices without first raising wages.

His chairmanship could turn on articulating a strategy for a central bank operating in a world of deglobalization, reduced immigration and recurring conflict-one that looks little like the 1990s he holds up as a model.