Key Takeaways:
Federal Reserve Chair Kevin Warsh told Congress he will not declare victory on inflation despite softer June data, indicating a preference for tighter policy.
Federal Reserve Chair Kevin Warsh said Tuesday the central bank will make high inflation "a thing of the past," downplaying a softer-than-expected June CPI report and indicating he favors tighter policy to bring prices under control.
"While some may say 'mission accomplished,' I do not share that view," Warsh said in prepared testimony to the House Financial Services Committee, referring to the June CPI data that showed prices dropped 0.4% from May, the largest monthly decline in four years.
The Fed's preferred inflation gauge stands at 4.1%, more than double the 2% target and above target for over five years. About half of the 19 members of the Federal Open Market Committee expect to raise rates by year-end, while the rest pencil in no change or a cut. Warsh said he would demand "a good family fight" among colleagues over "the extent and timing" of using the Fed's tools.
The hawkish pushback partially reversed the bond market's initial relief rally from the CPI data. Two-year Treasury yields fell about 7 basis points — less than the steeper decline seen immediately after the release — while the S&P 500 rose 0.3% and the Bloomberg Dollar Spot Index slipped 0.3%. Traders are now repricing rate expectations as the Fed navigates a divided committee and a rapidly changing economic outlook.
The divided outlook reflects competing forces shaping the inflation trajectory. On one side, the June CPI report showed annual inflation slowing to 3.5% from 4.2% in May, beating economist expectations. On the other, oil prices have climbed again after the renewal of the Iran war, and gas prices — though down about 20% from their peak — remain roughly 35% higher than before the U.S. attacked Iran on Feb. 28.
AI investment is adding another layer of complexity. Warsh described the massive capital spending by hyperscalers such as Alphabet, Microsoft, Amazon and Meta Platforms as "the most striking feature of the economy right now," saying the Fed is monitoring its implications for inflation and jobs. Surging demand for memory chips and processors has driven semiconductor prices higher, pushing up costs for laptops, tablets and video game consoles.
Other Fed officials have filled the guidance void as Warsh has stepped back from providing forward guidance. Fed Governor Christopher Waller said Monday that another hot inflation report would mean the Fed would have to consider raising rates "in the near term." But New York Fed President John Williams said last week that if core inflation holds at a 0.2% monthly pace, the central bank could avoid hiking — implying rates would remain steady while the Fed monitors incoming data.
The last time the Fed faced a similarly divided committee was in 2016, when some officials pushed for rate increases while others urged patience as global growth concerns mounted. The Fed ultimately raised rates once that year, in December, after delaying action for most of the year.
Warsh, who was confirmed with only one Democratic vote in the Senate, nonetheless drew praise from multiple Democrats on the committee. Veteran congressional reporter Steve Dennis noted that Democrats are trying to bolster Warsh as President Donald Trump continues to pressure the Fed for lower rates.
This article is for informational purposes only and does not constitute investment advice.
