In his first major testimony to Congress, the new Federal Reserve Chair, Walsh, pledged to Congress that the Fed would have zero tolerance for inflation and that political considerations would not factor into its decisions. He also outlined the formation of new working groups, signaling the beginning of a "new chapter" for the central bank.
On Tuesday, Chair Walsh appeared before the House Financial Services Committee for a three-hour hearing, repeatedly emphasizing a core commitment to lawmakers: the Federal Reserve is determined to bring inflation down, and members of the Federal Open Market Committee (FOMC) have "zero tolerance for persistently high inflation."
He stated bluntly during the hearing that inflation remaining above the 2% target for the past five years was, in itself, a failure of the Fed's duty. Although data released the same day by the U.S. Labor Department showed that June's Consumer Price Index (CPI) had cooled, with core prices excluding food and energy registering zero growth—alleviating some external concerns about inflation—Walsh made it clear he would not base his judgment on a single month's data, avoiding excessive optimism or pessimism.
"Some people might look at this morning's [CPI] data and say, 'Great, mission accomplished, everything is fine.' I don't see it that way," he said.
Interest Rate Tools Remain in the Arsenal
Nick Timiraos, a Wall Street Journal reporter often seen as a Fed whisperer, noted that Walsh remained cautious on the question of whether interest rates would be adjusted. He did not signal the next policy move in advance nor define when high inflation would be deemed "persistent." However, Walsh simultaneously stressed that with the right policies, the Fed would undoubtedly achieve its goals. "If we get the policy right—and we will—then the inflation surge of the past five years will be history."
While Walsh did not explicitly declare an imminent monetary policy tightening, he made it clear during his congressional testimony that tools to curb inflation include interest rates. "We have the ability to do that," he said, adding that in the coming period, he would ask his colleagues to engage in thorough discussions on when and to what extent these monetary policy tools should be deployed.
Economists widely believe that these remarks do not necessarily signal an imminent rate hike, but they represent Walsh's closest public acknowledgment since returning to the Fed in May that a policy tightening might be necessary if conditions warrant.
Olu Sonola, Head of U.S. Economics at Fitch Ratings, stated, "This is perhaps the closest Walsh has come to acknowledging that the Fed might hike rates to address persistently high inflation without explicitly signaling it first."
Economists at Goldman Sachs noted in a client report that Walsh's comments reflect his view on the high inflation triggered by supply shocks.
When pressed by lawmakers on how he would deliver on his promises, Walsh emphasized that many factors driving prices higher are outside the Fed's direct control, including "overseas conflicts and other factors." He said, "We cannot and should not directly control those factors." However, he added that the outcome remains the Fed's responsibility because "inflation is a choice, which means monetary policymakers need to choose lower prices."
He pointed out that the central bank can respond to inflation by adjusting interest rates or the size of its asset portfolio, and now is not the time for "passing the buck or blaming others."
Asked why he was not providing more detailed forward guidance on how to handle changing circumstances, as his predecessor did, Walsh explained that if policymakers provide economic forecasts, "we find ourselves a bit like only taking information that's consistent with our prior beliefs and discounting information that's not. That's not the way to do things." He added, "Maintaining more caution is a better way to make objective judgments."
Jason Furman, a professor at Harvard Kennedy School and a top economist in the Obama administration, said Walsh's testimony maintained his usual style, offering no new forward guidance. "Anyone who thinks they might have heard hints of his future plans misheard him. I don't think he's decided what he wants to do yet," Furman said.
Independence, Political Pressure, and Internal Tensions
Walsh served as a Fed Governor from 2006 to 2011 and returned to the central bank in May. Over the past year, former President Trump consistently pressured the Fed, including publicly demanding rate cuts, attempting to dismiss Fed Governor Cook, and having the Justice Department initiate a criminal investigation into Walsh's predecessor, Powell.
Timiraos pointed out that against this backdrop, Walsh's unambiguous commitment to low inflation is also seen as a direct response to this political history.
Walsh's view is that the Fed's independence is not an abstract principle but must be earned by delivering on its promises; political pressure has intensified precisely because the Fed failed to meet its inflation target over the past five years. Under persistent questioning from lawmakers of both parties, he pledged not to consider political factors when deciding on interest rates.
However, Timiraos also warned that if Walsh and his colleagues ultimately judge that fulfilling these promises requires raising interest rates, tensions both within the Fed and externally could escalate further. A growing number of officials have begun to suggest that if inflation pressures do not recede quickly, it will be necessary to include rate hikes in discussions in the coming months.
The backdrop to this policy divergence is that last year the Fed cut rates three times, fearing a weakening labor market, but the anticipated recession did not materialize. Hiring stabilized, the unemployment rate barely changed, and the softness officials previously worried about dissipated. In its place, price pressures emerged simultaneously from three directions: tariffs on imported goods, energy and commodity supply disruptions from conflicts involving Iran, and demand pull from artificial intelligence infrastructure investment.
Under this mix, the U.S. economy has shown resilience, but inflation has remained at 3% or higher, depending on the measure. Fed Governor Waller, who led last year's rate-cutting campaign, said on Monday he had "good reason" to believe inflation would improve in the coming months; but if sustained progress remains elusive, rate hikes should be considered. "Staring at inflation and hoping it melts under our stern gaze is not a viable option," he said.
Advancing the Fed's Reform Agenda
Beyond inflation and interest rates, Walsh used the hearing to further detail his reform plans, aiming for a comprehensive overhaul of how the Fed assesses the economy, communicates externally, and forms policy decisions. Just last week, he appointed external leaders to head five working groups tasked with advancing this reform.
Addressing concerns that these working groups and reduced public communication might weaken transparency and accountability, Walsh denied this. He said the groups would first report their findings to the Fed's rate-setting committee, but the work would also be made public. "Nothing here is going to be done in secret."
In Walsh's view, this reform is necessary because the Fed's past policies themselves bear responsibility for the current inflation. "The Fed changed its academic framework and operational framework in ways that contributed to price increases, and the harm that has done to the most vulnerable among us exceeds that of any policy I can imagine," he said, later adding, "That is why we must reform it."
One task for the five working groups is to assess whether new technologies, including artificial intelligence, can provide new insights for the Fed's analysis and decision-making. Throughout the hearing, Walsh repeatedly discussed AI infrastructure investment, focusing on this area even more than other features of the economy. He emphasized that such investments have the potential to support growth without necessarily fueling inflation.
However, regarding AI and the longer-term economic outlook, Walsh still advocated for caution. "The long-term outlook may be far off, and in the meantime, we must monitor developments month by month, quarter by quarter," he said.
Walsh also emphasized that these working groups collectively mark the beginning of "a new chapter for the Federal Reserve." He stated, "I am truly honored to be back at the Fed, working again with so many talented and dedicated colleagues."
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