Federal Reserve Chairman Kevin Warsh told Congress on Tuesday that price stability is non-negotiable, but he refused to telegraph whether interest rate increases are coming soon, continuing his strategy of keeping the market guessing about the Fed's next move.
In prepared testimony before the House Financial Services Committee, Warsh declared that getting monetary policy right is the Fed's top priority. "If we get policy right, and we will, the inflation surge of the last five years will be a thing of the past," he said. The Fed flatly rejected tolerance for what he called persistently elevated inflation, pledging the central bank's full commitment to restoring price stability.
The chairman's careful language stood in sharp contrast to mounting pressure from other Fed officials to consider rate hikes. Consumer prices rose 3.5% over the past year, with core inflation at 2.6% when stripping out food and energy costs, according to new Labor Department data released in tandem with his testimony.
Behind the scenes, Fed colleagues are openly debating whether rate hikes could arrive as soon as a policy meeting concluding June 29. Fed Governor Christopher Waller said Monday that while inflation could still fall to the central bank's 2% target under current policy, he is "concerned about the equally plausible case" that price pressures persist or worsen. That scenario, he warned, would demand tighter monetary policy sooner rather than later.
New York Fed President John Williams added another constraint: if core inflation measured by the Fed's preferred gauge exceeds 0.2% a month, "monetary policy would need to respond to that."
Warsh's refusal to lay out his reaction function or explain how the Fed would respond to different economic data leaves investors and traders scrambling to price in the odds of a rate increase. By abandoning the modern Fed practice of explicit forward guidance, Warsh has essentially ceded the field to his colleagues, who are now offering market-moving hints about what might trigger action.
The chairman did acknowledge one wild card: a burst of investment spending tied to artificial intelligence that is already pumping some heat into the economy. "We at the Fed are monitoring the implications for inflation and the labor market," Warsh said, adding that policymakers face a historic moment where they must ensure the American economy remains competitive.
Author James Rodriguez: "Warsh's testimony was a masterclass in saying nothing while his colleagues spell out the price hike scenario openly, which only adds to the confusion the Fed seems determined to create."
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