U.S. Federal Reserve Chair Kevin Warsh signaled a strong hawkish (preference for monetary tightening) resolve not to ever tolerate inflation that stays persistently high. Even though the recently released June inflation data showed a clear slowdown, observers said the Central Bank chief personally moved to warn against premature relief. Major outlets reported that investors took this as a clear sign the Federal Reserve will approach any interest rate cuts with great caution for the time being, and they appeared on edge.
On the 14th, Warsh appeared before the U.S. House Financial Services Committee hearing and repeatedly stressed his firm stance on price stability. He said, "Members of our committee will never tolerate inflation that continues to remain at a high level," and "we share a firm commitment to restoring price stability."
Warsh in particular declared that "inflation is a choice," labeling past monetary policy, including the average inflation targeting introduced in 2020, as a mistake. He went on to call the situation over the past five years, in which inflation exceeded the target, "an unfair tax imposed on the American people and corporations," and said, "A comprehensive policy overhaul is necessary."
The June consumer price index released by the U.S. Department of Labor rose 3.5% from a year earlier, below the market forecast of 3.8%. The core consumer price index, excluding food and energy, also slowed from 2.9% in May to 2.6% in June. But Warsh drew a line, saying the course of monetary policy cannot be presumed from a single data point. He shot back, "Some might look at this morning's data and say, 'Oh, mission accomplished. Everything is great,' but my view is different."
Warsh also hinted at his conviction to protect Central Bank independence amid U.S. President Donald Trump's pressure to cut rates. When asked by a lawmaker, "Do you work for President Trump?" he retorted, "We (the Fed) are independent, and it is an honor to be independent." He said that even if outside pressure mounts, he would "follow the law and follow the data," signaling he would stick to principles.
Asked to name the key factor currently driving the economy, he pointed to "investment related to artificial intelligence." He said, "Corporations are building data centers and pouring in large amounts of capital to secure AI equipment and software," calling it "the most significant change to appear in the U.S. economy over my adult lifetime." He added, "It may take considerable time for large-scale investment to translate into productivity gains across the economy," and, "We will closely watch conditions every month and every quarter."
Warsh also disclosed the concrete progress of work to fundamentally change the Central Bank system. The Fed has formed a special task unit to review five areas, including balance sheet reduction, overhauling public communications, and how it gauges prices. The special unit plans to invite outside experts such as former Bank of England Governor Mervyn King and draw conclusions on the direction of Fed changes by the end of the year.
Warsh criticized the Fed's practice of preemptively offering guidelines ahead of rate decisions. He declared, "Going forward, until we have reviewed all economic indicators, the Fed will stop actions that imply a specific rate path." Market experts, citing this, projected that the Federal Reserve will find it difficult to cut rates not only at the policy meeting two weeks from now but also for the next several months.