Fed’s Warsh Promises Congress a Hard Line on Inflation Amid Looming Risks

Hawks looking for evidence a rate hike is urgently needed haven’t found it yet.

Consumer prices jumped 3.5% in June, the Bureau of Labor Statistics reported Tuesday morning. That’s higher than the Fed’s preferred 2% inflation rate, but lower than the 4.2% May rate as well as analysts’ expectations for the data. One month of Consumer Price Index figures isn’t enough for the central bank to toss the idea of a rate hike out the window, but it’s enough to at least give its Federal Open Market Committee an inkling that there’s no rush to increase the benchmark federal funds rate at its meeting later this month. 

CME’s FedWatch tool placed the likelihood of a hike at the July 29 meeting at just 16.6% as of midday Tuesday. Traders put the chances of the Fed holding rates steady at 83.4%. 

Warsh’s Take  

So what does that mean for new Fed Chair Kevin Warsh’s next move? In classic Warsh fashion, he’s not saying. But he made one thing very clear Tuesday morning during his first appearance before Congress as the central bank’s leader: Fed policymakers have “no tolerance” for high inflation. “The Fed’s No. 1 objective is to get monetary policy right, or as near to it as we possibly can,” he said in remarks shared ahead of his testimony. If they get it right, he added, “the inflation surge of the last five years will be a thing of the past.” 

How the Fed is going to do that is unclear, and Warsh is dealing with a committee that is split on where interest rates should head. Despite the positive inflation figures, it could be a bumpy ride. Oil prices surged this week as the conflict between the US and Iran escalated, so the nearly 10% drop in gas prices shown in the latest CPI data may not stick around: 

• “Tuesday’s weaker-than-expected CPI print suggests the inflation surge driven by the Iran war is fading, but this may just be a temporary relief as tensions have escalated in recent days,” Skyler Weinand, chief investment officer at Regan Capital, said in written comments shared with The Daily Upside. 
• “I wouldn’t bet on these more modest inflation readings continuing for the remainder of the year,” Mike Reid, head of US economics at RBC Capital Markets, told The Wall Street Journal.

Hawks Here: Weinand added that while the latest inflation data reduces the odds of a rate hike for now, investors should remember that “almost every communication that has emanated from Chair Warsh during his short tenure” has been hawkish. “Warsh is looking to get consumer prices under control, and the best tool the Fed currently has is raising interest rates.”