Warsh vows zero tolerance on inflation as Fed split deepens

Warsh told lawmakers the Fed has "zero tolerance" for persistently high inflation, pushing back against market bets on rate cuts as the FOMC remains deeply divided.

Federal Reserve Chair Kevin Warsh told Congress the central bank has "zero tolerance" for persistently high inflation, reinforcing a hawkish posture that leaves the Fed's rate-setting committee split nine-to-nine on the next move.

"The committee has zero tolerance for persistently high inflation, and we are jointly and firmly committed to restoring price stability," Warsh said in prepared testimony Tuesday to the House Financial Services Committee. "If we get policy right — and we will — the inflation surge of the past five years will be history."

The remarks came as the Fed held its benchmark rate at 3.5% to 3.75% for a fourth consecutive meeting in June, with minutes showing half of 18 policymakers projecting at least one quarter-point hike by year-end while the other half favored holding or cutting. Six of those favoring higher rates expect at least two increases. Warsh, who declined to submit a personal rate forecast, said the labor market remains "broadly stable" with minimal layoffs and solid nominal wage growth.

The standoff matters because markets have been pricing in rate cuts that Warsh's testimony suggests are not imminent. With the Iran war pushing energy prices to three-year highs and the median US home price hitting a record $440,600, the cost of living remains the dominant political and economic issue heading into the second half of 2026.

The June 16-17 meeting was the first under Warsh's chairmanship, and the minutes revealed an FOMC increasingly focused on inflation as labor market concerns eased slightly. The International Monetary Fund last week downgraded its global growth forecast to 3% for 2026, citing the energy shock from the conflict, while the International Energy Agency projected the first decline in global oil demand since 2020 — a drop of 1 million barrels per day.

Warsh struck a cautious note on the artificial intelligence boom, acknowledging it is driving a surge in business investment while warning it introduces new economic uncertainty. "We do not yet know to what extent the economy will benefit from AI buildout," he said. "New opportunities for the economy also present new challenges for policymakers, and the Fed is closely monitoring its impact on inflation and the labor market."

The last time the Fed faced a comparable internal divide was in 2023, when hawkish hold language preceded a period of elevated bond yields that tightened financial conditions without additional rate increases. Overnight index swaps currently imply a roughly 40% probability of a cut by September, down from 65% a month ago, as traders recalibrate to Warsh's harder line.

US jobless claims edged down 2,000 to 215,000 in the week ended July 4, the Labor Department reported Thursday, while the June jobs report showed employers added just 57,000 positions — less than half the prior month's total. The combination of a cooling labor market and sticky inflation presents the Fed with a stagflationary backdrop that Warsh's testimony did not directly address.

The next FOMC meeting is scheduled for Sept. 15-16, by which time another inflation reading and two more jobs reports will have landed. If the data shows price pressures persisting, the nine officials favoring hikes may gain the upper hand — and Warsh's zero-tolerance language suggests he would back them.

This article is for informational purposes only and does not constitute investment advice.