Mission Not Accomplished: Fed Policy Tweaks Under New Chairman Aim To Nip Inflation in the Bud

A government report showing cooling inflation in consumer costs does not mean the fight has been won, the Federal Reserve’s Kevin Warsh told House members Tuesday in his first semi-annual testimony to Congress as chairman.Saying he has no tolerance for persistent inflation, Mr. Warsh spoke just after the release of Labor Department figures showing the annual inflation rate backpedaled to 3.5 percent in June. That was down from 4.2 percent in May. Much of the robust drop is due to lower gas prices following an interim peace agreement between Iran and America that has since unraveled. Calling short-term swings inevitable, the close-to-the-vest chairman said getting monetary policy right is key to reducing a lingering higher-than-desired inflation rate. “I don’t want to overread or cherry-pick data. There might be some who look at this morning’s data and say, ‘Well, mission accomplished, everything is swell.’ That is not my view,” Mr. Warsh told the House’s Financial Services Committee on Tuesday. The chairman will return to Capitol Hill on Wednesday to testify in front of the Senate Banking Committee. His testimony will follow the monthly release of the change in costs of goods and services sold by domestic producers known as the Producer Price Index.Mr. Warsh said Tuesday his goal is to get policy correct so that “the inflation surge of the last five years will be a thing of the past.” He did not hint about the Fed’s next move but said 63 months of above-target inflation needs a “regime change in policy.” “My colleagues and I recognize that high inflation has been an undue burden on American households and businesses,” Mr. Warsh said in his remarks.The dip in June’s inflation data was enough for traders to predict that the Fed will skip a rate hike at its July policy meeting in two weeks. CME Group’s FedWatch tool now has an 86 percent probability that rates will remain steady. Longer term, the consensus is that an increase will come by the end of the year.“We still think it’s a matter of when, rather than if, the Fed will raise interest rates,” Capital Economics analysts wrote in a note to clients. “The big picture to us is that the AI investment boom, coupled with signs of rebounding consumer demand, will continue to keep core inflation above target.”Federal Reserve governor Christopher Waller on Monday said a growing case is being made for the inflation rate to improve, but a future rate increase is not out of the question. “Sternly staring at inflation until it melts before our withering gaze is not an option,” Mr. Waller told the New York Association for Business Economics.The Fed has a two percent target for inflation. The inflation rate has been above that mark since 2021. Despite that, President Trump repeatedly berated the former Federal Reserve chairman, Jerome Powell, for not cutting rates. Democrats on the committee asked Mr. Warsh how he would respond if the president pressured the Fed to cut rates.“My commitment to you is to follow the law and follow the data, follow our very best judgment,” Mr. Warsh told Congressman Gregory Meeks.Since his start at the Fed just six weeks ago, Mr. Warsh has launched five task forces on communications, balance sheets, data, productivity and jobs, and inflation frameworks, all led by external advisors working with Reserve staff. The chairman said he was impressed by the collegiality displayed so far, but more importantly, the efforts are changing the way the Fed thinks about and communicates monetary policy moves.“If we were to give you my projection today about what we will do when we meet in two weeks, what we’ll do over the course of the year that we then find ourselves sort of taking information that is consistent with our priors and rejecting information that is inconsistent,” he said. “Not the way we want to do things.” Mr. Warsh said that economic activity is expanding at a solid pace and household consumption growth is moderate. He noted that AI hasn’t displaced workers but has made workers only a bit more productive. He said he expects intelligence tokens to contribute more in the next 12-18 months. He also noted that manufacturing output has moved up steadily this year. Mr. Warsh said a big laggard is the housing sector. Mortgage rates start the day Wednesday at their worst point of the year, with 30-year fixed rates at 6.75 percent, matching the May 19 peak of the last 11 months, according to housing finance data company Impact Capitol.

Mission Not Accomplished: Fed Policy Tweaks Under New Chairman Aim To Nip Inflation in the Bud

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