Warsh vows to defeat inflation as June CPI falls to 3.5%

Federal Reserve Chair Kevin Warsh promised lawmakers Tuesday that inflation will become a "thing of the past" as the central bank navigates cooling price pressures while reaping what he called untold benefits from an artificial intelligence investment boom.

"We are going to get monetary policy right and deliver price stability for the American people," Warsh said in prepared remarks for his appearance before the House Financial Services Committee, his first congressional testimony since being sworn in as Fed chair on May 22.

The remarks come as the Labor Department's June Consumer Price Index showed the annual inflation rate falling to 3.5% from 4.2% in May, with core inflation — which strips out volatile food and energy costs — declining to 2.6% from 2.9%. The fed funds rate currently sits at 3.50% to 3.75% after six consecutive cuts between September 2024 and December 2025, with the Federal Open Market Committee holding steady at its June 16-17 meeting.

With the next FOMC meeting scheduled for July 29, the central bank faces a divided outlook: inflation remains above the 2% target even as it decelerates, while the Iran-driven oil price shock that pushed inflation to a three-year high of 4.2% in May has begun to fade. Overnight index swap markets will now recalibrate expectations based on whether Warsh's tone signals a prolonged hold or the possibility of further tightening.

Warsh's prepared remarks struck a notably optimistic tone on the economy's underlying strength, citing the artificial intelligence infrastructure build-out as a structural tailwind. "The economy is in otherwise solid shape and will reap untold benefits from artificial intelligence investment," he said, according to the prepared text.

The Fed chair has been vocal about reforming the central bank's communication strategy since taking office. At his first FOMC meeting in June, Warsh presented a stripped-down policy statement devoid of forward-looking guidance on interest rates — a break from the Powell era's emphasis on signaling the likely path of policy. Minutes from that meeting showed the FOMC evenly split between officials who see inflation falling toward the 2% target on its own and those who consider a rate increase necessary if higher inflation persists.

A Divided Committee Faces a July Decision

The June FOMC minutes, released July 8, revealed that a "few participants" saw a case for raising borrowing costs at that meeting, though they ultimately agreed to hold rates steady. "Several participants commented that price pressures had become more broad-based," the minutes said, citing increases across transportation, air fares, petrochemical products and agricultural inputs.

Fed Governor Christopher Waller reinforced the hawkish stance in remarks July 13, telling the New York Association for Business Economics that the escalation in core inflation was "more concerning" than the headline figure. Waller also pushed back against President Donald Trump's repeated calls for lower rates, saying the Fed "is not going to keep rates down just to help the government finance its deficits."

Average hourly earnings rose 3.5% over the year in June, matching the headline inflation rate, meaning many American workers saw their purchasing power hold steady. Core inflation at 2.6% trailed wage growth, while grocery and gasoline prices — which hit consumers most directly — remained elevated.

The Balance Sheet Challenge Lingers

Despite Warsh's promises on inflation, one of his most vocal reform proposals — shrinking the Fed's $6.725 trillion balance sheet — has made no progress since he took office. The central bank's asset holdings have grown by roughly $20 billion since May 27, moving in the opposite direction of Warsh's stated goal of getting the Fed "out of the fiscal business."

The last time the Fed attempted quantitative tightening at scale, between 2022 and 2025, it reduced the balance sheet from nearly $9 trillion to approximately $6.54 trillion before the process stalled. The renewed expansion shows the challenge of deleveraging while the Treasury continues to run deficits that require debt issuance — a dynamic Waller explicitly said the Fed would not accommodate.

For investors, the key question is whether Warsh's inflation-fighting resolve translates into higher rates at the July 29 meeting or a prolonged hold that keeps policy restrictive well into 2027. The answer depends on whether the July oil price rebound — driven by renewed U.S.-Iran hostilities after a brief ceasefire — reverses the June disinflation trend or proves temporary.

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