Key Takeaways:
White House economic adviser Kevin Hassett said current data does not justify higher rates, putting him at odds with the Fed's cautious inflation stance.
White House National Economic Council Director Kevin Hassett said Tuesday that recent economic data provides no justification for raising interest rates, directly entering the debate over the Federal Reserve's next move after June's Consumer Price Index showed prices fell 0.4% from May — the largest monthly drop since April 2020. "The data shows no reason to raise interest rates," Hassett told reporters outside the White House, citing declines in drug prices and car insurance costs as evidence of President Donald Trump's policy success.
"I reviewed the data that came out this morning on CPI and it was positive relative to expectations," Hassett said, echoing language used by Fed Chair Kevin Warsh earlier in the day. "But boy, when they look at the data today, they're going to think, jeez, things are really moving in the right direction." Hassett expressed confidence in Warsh's leadership, saying he believes the Fed chair will make the correct rate decisions and noting he had a "pleasant conversation" with Warsh days earlier.
June's headline inflation slowed to 3.5% year-over-year, down from 4.2% in May, while core prices — excluding food and energy — rose 2.6%, still above the Fed's 2% target. The improvement was driven largely by a 0.4% monthly drop in overall prices, though oil prices have since rebounded after the U.S. renewed its blockade of the Strait of Hormuz, sending Brent crude up 4.6% to $87.13 a barrel on Tuesday.
The divergence between the White House and the Fed comes as Warsh presides over a sharply divided rate-setting committee. About half of the 19 policymakers penciled in higher rates by year-end in forecasts released last month, while the other half favored keeping rates unchanged or cutting them, according to the Fed's Summary of Economic Projections. Markets currently price a 93.5% probability that the Fed will hold rates at 5.25% to 5.50% at its July 28-29 meeting, per CME FedWatch data.
Warsh's Inflation Stance
Warsh, in his first congressional testimony since becoming chair on May 22, struck a more cautious tone than the White House. "I am not going to show up here and say 'mission accomplished,'" Warsh told the House Financial Services Committee. "There's plenty of work to do." He said the Fed has "no tolerance for persistently elevated inflation" and that the inflation surge of the last five years "will be a thing of the past" if policy gets right.
The Fed chair also pushed back on potential political pressure, telling lawmakers his commitment is "to follow the law and follow the data, follow our very best judgment" when asked how he would respond if Trump demanded rate cuts. The Supreme Court recently blocked Trump's attempt to fire Fed Governor Lisa Cook, a decision Warsh cited as affirming the central bank's independence.
Geopolitical Crosscurrents
Hassett also addressed the Iran situation, saying the country's ability to hold the global economy hostage has diminished. The U.S. renewed its blockade of the Strait of Hormuz on Monday, with Trump declaring the U.S. would become the "Guardian of the Hormuz Strait." Oil prices have climbed about 35% since the U.S. attacked Iran on Feb. 28, though they had fallen back nearly to prewar levels before the latest escalation.
The renewed conflict threatens to reverse the inflation progress seen in June. Some Fed officials have argued that underlying inflation, even excluding gas prices, remains elevated and may require higher rates. Fed Governor Christopher Waller said Monday that another "hot" inflation report would force the Fed to consider raising rates "in the near term," while New York Fed President John Williams said a sustained 0.2% monthly core inflation pace could allow the Fed to avoid hikes.
This article is for informational purposes only and does not constitute investment advice.
