Fed’s Warsh drops fresh clues on interest-rate path, inflation

Kevin Warsh threw down a few red cards during his first meetings with Congress as Federal Reserve Chairman, especially during often-spicy grilling by Senate Democrats over ethics, independence, and artificial intelligence.

However, he did strike a hint of forward guidance to investors and consumers about interest-rate paths and inflation during America’s current afforability crisis without actually saying the words “interest-rate hikes.”

“We have the tools to do it,” Warsh said. “Over the coming period, I’m going to ask our colleagues to have a good family fight about the extent and timing in which we would need to deploy those.”

Forward guidance is a tool used by central banks to communicate to the public and financial markets the expected future path of monetary policy on borrowing costs.

Warsh has said during his first seven weeks as head of the U.S. central bank that he would like to drop forward guidance completely, the opposite practice of his predecessors.

“This is probably the closest Warsh has come to acknowledging that the Fed could raise rates in response to persistently high inflation, without explicitly signaling a hike,” Fitch Ratings Head of U.S. Economics Olu Sonola said.

Warsh noted in testimony both days during the semi-annual Monetary Policy Report to Congress July 14-15 that inflation has hit above the Fed’s 2% target for the past 63 months.

He also emphasized repeatedly to legislators in both chambers that the Fed was committed to delivering the price stability side of its mandate but stopped short of delivering actual forward gudiance.

Warsh did offer the Senate Banking Committee one option the Fed might use to evaluate if inflation was becoming persistent. It will consider whether price increases were impacting “the generalized price level” instead of one specific category such as oil and gas, he said.

While Fed watchers said the new Chairman’s comments didn’t foreshadow an interest-rate hike in the near term, Warsh’s remarks were the closest he’s come to date to saying that monetary policy may need to become more restrictive if inflation turns stubborn.

Monetary Policy Analytics Inc. Economist Derek Tang told Bloomberg that Warsh “definitely revealed a little bit more about his inflation framework.”

“The current inflation we’re seeing right now does not alarm him unless we see more second-round effects,” Tange said.

Warsh focuses on AI-demand impact on prices

While Warsh repeated multiple times a hawkish commitment to use monetary policy to curb inflation, he didn’t outline exactly what tactics the U.S. central bank would deploy — directing his legislators to the five blue-ribbon task forces he created to study a host of Fed reforms.

One of those will focus squarely on AI.

“I don’t view a one-time change in prices as necessarily being inflationary, because I think there’s a supply response,” Warsh did say regarding the massive investment in AI infrastructure that’s driving up prices on chips, software, and labor.

“Will it increase measured prices over the course of the next 12 months? I suspect it will be. Whether that’s inflationary or not, that’s up to the Federal Reserve, and we’re going to have something to say about that,” he said.

Dell, Microsoft and Apple are among the companies that have announced they will be raising prices to consumers on laptops, tablets, and video game consoles because of AI buildout.

Warsh said that the current AI investment boom won’t necessarily lead to persistent price pressures in the long term.

Fed Governors Christopher Waller and Lisa Cook, as well as New York Fed President John Williams recently stated their concerns about AI’s impact on the economy.

Warsh commits to Fed independence from Trump

Central bank independence from political and bipartisan pressures is considered vital for long-term economic and market stability because it insulates monetary policy from the whims of the executive branch.

President Donald Trump repeatedly attacked Jerome Powell, Warsh’s immediate predecessor, for not slashing interest rates dramatically. The president said he would not nominate a replacement for Powell who didn’t agree with him. He has since publicly backed away from that stance.

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But this was after Trump and his allies in the administration pushed for an unprecedented criminal investigation into Powell’s testimony to Congress about renovation costs at the Fed’s headquarters that has since been dropped. Trump also tried to fire Cook for cause over unsubstantiated allegations of mortgage fraud, a case that remains pending.

Maryland Democrat Sen. Chris Van Hollen asked Warsh if he has had recent conversations with Trump over interest rates and monetary policy.

“I don’t want to be in the business of sharing discussions that the president and I have,” Warsh responded.

“I will tell you what I’ve said to the president repeatedly and said to the Treasury Secretary: They chose an independent guy to do the job and that’s exactly what I plan on doing,” he added.

By a long-standing tradition, the Fed Chairman and the Treasury secretary meet for a weekly breakfast.

Warsh said he’s continued to do so with Treasury Secretary Scott Bessent.

“I talk to him often between that,” Warsh said, adding that he will make his own decisions about interest rates.

Warsh addresses June drop in CPI, PPI

Consumer and wholesale prices dropped in June reflecting a dip in oil prices that surged from the energy shock of the Iran War.

Warsh signaled definite caution on those reads.

“Any central banker would be happy to have data going in the right direction,” he said, but “these are all imperfect measures of the state of underlying inflation.”

Interest rates, jobs, inflation require a delicate balance

The Fed’s dual mandate from Congress requires maximum employment and stable prices.

Lower interest rates support hiring but can fuel inflation. This risks fueling further inflation, potentially leading to an inflationary spiral.

Higher rates cool prices but can weaken the job market. This increases the cost of borrowing and further stifles economic activity.

The Monetary Policy Report, issued July 10, said the outlook of the future path of interest rates “is subject to considerable uncertainty.”

It also described the U.S. economy as overall “expanding at a solid pace despite elevated uncertainty that owes, in part, to the conflict in the Middle East.’’

Traders adjust rate-hike bets after Warsh’s remarks

The rate-setting Federal Open Market Committee voted unanimously last month to hold its benchmark Federal Funds Rate target in a range of 3.5%-3.75%.

But the minutes of the June FOMC meeting showed policymakers split on inflation risk and the impact on interest rates.

A change in the funds rate triggers moves in short-term borrowing costs ranging from credit cards to auto loans and influences longer-term rates such as mortgages.

Following Warsh’s two days on Capitol Hill and the June inflation reports, futures traders reset bets to nearly 90% that the FOMC would hold rates steady again at its July 28-29 meeting.

September is a coin toss with the CME Group FedWatch Tool also penciling a 51% chance of a rate hike then as well as an over 70% probability of a rate hike by the end of the year.