Federal Reserve Chair Kevin Warsh asserted on Tuesday that the Fed has "no tolerance for persistently elevated inflation" and is dedicated to re-establishing price stability. However, in line with his policy of providing less forward guidance, Warsh did not signal whether interest rate increases would be necessary to combat inflation. This statement was made during his first appearance before Congress since becoming chair on May 22, succeeding former chair Jerome Powell. The Fed's next rate-setting committee meeting is scheduled for July 28-29.
Warsh emphasized that the Fed's commitment is to "follow the law and follow the data, follow our very best judgment." He spoke to the House Financial Services Committee shortly after the government reported that inflation declined by 0.4% from May to June, largely due to cheaper gas prices. Core inflation, which excludes volatile energy and food, remained unchanged last month, indicating a broader slowdown in price increases than economists had anticipated. Compared to a year ago, headline inflation fell to 3.5% from 4.2% in May, while core inflation rose a mere 2.6% in June from a year earlier, down from 2.9% in May. Despite these positive signs, the core inflation figure still exceeds the Fed’s 2% target.
While the cooling inflation figures could lessen the pressure on the Fed to hike interest rates, the renewed conflict in the Middle East has already driven up oil prices, potentially reversing some of this progress. Warsh, when questioned about the recent inflation data, cautioned that it represents only one month of data and does not signify that inflation has been defeated. He stated, "There might be some that look at this morning’s data and say, ‘mission accomplished.' That is not my view." He also highlighted massive investment in artificial intelligence infrastructure as a factor that could boost inflation for the remainder of the year due to soaring semiconductor prices.
Warsh leads a rate-setting committee that appears sharply divided, with approximately half of the 19 policymakers projecting higher interest rates by year-end in forecasts released last month, while the other half favor keeping rates unchanged or even cutting them. This division presents a significant challenge for Warsh as he navigates a rapidly changing economic landscape. Other Fed officials have offered more explicit guidance; for instance, New York Fed President John Williams suggested that if core inflation maintains a 0.2% monthly pace, the Fed might avoid rate hikes, and Fed Governor Christopher Waller indicated that a "hot" inflation report would necessitate considering rate increases.
Warsh also touched on the Supreme Court's decision to allow Fed governor Lisa Cook to remain on the central bank’s board, viewing it as an affirmation of the Fed's independence, especially in light of past presidential attempts to influence the central bank. He explained his reasoning for pulling back on "forward guidance," stating that providing projections too early might cause officials to be more likely to accept information consistent with their prior beliefs and reject inconsistent data. He assured that when the Fed has concrete news about solving the inflation problem, they will be very clear about it.
