Federal Reserve Chairman Kevin Warsh is scheduled to appear before the U.S. House Financial Services Committee at 10 p.m. tonight for the "Federal Reserve's Semi-Annual Monetary Policy Report" hearing, but his prepared testimony has been released in advance. In the testimony, he stated that Fed policymakers have "zero tolerance" for high inflation and reaffirmed their pledge to curb price growth that has remained elevated for five years. "Members of our committee have no tolerance for persistently high inflation," Warsh said in the testimony. "And we share a resolute commitment to restoring price stability."
Since taking office in May, the new Fed Chair has consistently emphasized policymakers' commitment to tackling inflation, stating that the primary goal is to ensure monetary policy is correct. "If we get policy right—and we will—the inflation surge of the past five years will be behind us," Warsh noted.
However, a dramatic reversal occurred at 8:30 p.m. Just an hour and a half before Warsh was set to deliver this hawkish testimony filled with "zero tolerance" rhetoric at 10 p.m., the U.S. Bureau of Labor Statistics released the June Consumer Price Index (CPI) report. This unexpectedly weak data, like a depth charge, directly disrupted the Fed's previously aggressive stance.
The data showed that U.S. CPI fell 0.4% month-over-month in June, not only far below market expectations of -0.1% but also marking the first month-over-month decline in six years. The year-over-year growth rate also dropped more than expected to 3.5%. More encouraging for Wall Street, the core CPI, excluding food and energy, recorded 0.0% month-over-month (flat, versus an expected +0.2%), with the year-over-year growth rate also falling to 2.6% (versus an expected 2.8%).
Following the data release, global financial markets instantly reversed course: U.S. stock index futures surged, Treasury yields plummeted, and investors began rapidly scaling back bets on a surprise Fed rate hike in July. The report suggested that as previous measures by President Trump take effect, with gasoline prices at the pump falling sharply, the initial energy shock from the U.S.-Iran war is subsiding.
As Warsh prepares to deliver his remarks, several other Fed policymakers have been warning that higher interest rates may be needed to curb inflation. However, as specifically noted: Warsh's hearing testimony was "prepared prior to" the release of this unexpectedly weak CPI data. This sudden "cooling" of data directly pulled the rug out from under the hawkish camp's plans to strongly advocate for rate hikes.
Regarding the economic outlook, Warsh has previously been optimistic, describing the labor market as broadly stable with few signs of layoffs and strong nominal wage growth. However, Fed officials must also face potential risks—although data suggests the worst shocks may be over, the risk of a secondary rebound in oil prices, should new hostilities erupt between the U.S. and Iran, could prolong the inflationary aftermath of this geopolitical conflict.
Furthermore, the Fed Chair has been more cautious regarding the artificial intelligence (AI) boom. He stated that AI is driving a surge in business investment but also introducing uncertainty into the economy. "We do not yet know the extent to which the economy will benefit from AI construction," Warsh said. "New opportunities for economic development also present new challenges for policymakers. We at the Fed are closely monitoring its impact on inflation and the labor market."
The minutes from the Federal Open Market Committee (FOMC) meeting on June 16-17 reflected growing concerns among policymakers about inflation. Officials unanimously voted at that meeting to keep the benchmark interest rate within the range of 3.5% to 3.75%. The interest rate projections (dot plot) released alongside the decision showed nine officials forecasting at least one 25-basis-point rate hike this year, with six of them expecting at least two hikes; the other nine officials projected rates would remain on hold or be cut.
Warsh, who has been critical of providing so-called "forward guidance" on interest rate paths to the market, directly refused to submit his personal projections this time. This barrage of hard data just before the hearing will place Warsh, who takes the stage at 10 p.m., directly in the hot seat. During the upcoming Q&A session, faced with this new evidence of inflation declining month-over-month for the first time in six years, the Chair who "rejects forward guidance" and refused to fill out the dot plot will inevitably be pressed by lawmakers on the spot: Will the Fed still stick to its previous pivot towards rate hikes?
Comments