Federal Reserve Chairman Kevin Warsh will testify before Congress, where lawmakers are eager for him to provide direct insights on inflation, interest rates, and economic risks. Analysis suggests that Warsh is facing his first major decision.
On July 14, Warsh will appear before the House Financial Services Committee for a semi-annual monetary policy report hearing in his capacity as the Federal Reserve Chairman. The following day, he is scheduled to testify before the Senate Banking, Housing, and Urban Affairs Committee on the same report.
This is a legal requirement for the Federal Reserve Chairman to appear twice a year for such hearings. The Federal Reserve had already submitted an official report to Congress on July 10, where policymakers clearly reaffirmed the Federal Reserve’s stance to bring the inflation rate back to the 2% target level.
Wall Street consensus indicates that what members of Congress most want to hear is how Warsh plans to bring inflation back to the 2% target level, making it the fundamental reason for his testimony before the committees.
During the June monetary policy meeting, the Federal Reserve unanimously decided to maintain the interest rates unchanged. However, renowned Wall Street Journal journalist Nick Timiraos, known as the “new Fed newswire,” suggests that maintaining this consensus in the coming weeks will become increasingly challenging for Warsh.
Timiraos often publishes exclusive in-depth articles, accurately predicting the Federal Reserve’s policy direction. In his article titled “Warsh’s First Major Decision: Reversing Last Year’s Rate Cuts” on July 13, he mentioned that concerns about inflation among Warsh’s colleagues have intensified since the last Fed meeting, possibly leading to considerations for rate hikes at the next meeting on July 28-29. When Warsh testifies before the U.S. Congress this week, he will have the opportunity to influence this consensus by presenting the latest inflation data from June, the final crucial data before the next meeting.
Last year, the Federal Reserve made three interest rate cuts due to concerns about the labor market. However, some Federal Reserve officials have always believed that the last two rate cuts were not justified, and some now advocate for reversing these rate cuts.
Timiraos points out that the reason for this shift is that the labor market, which was a concern for the Federal Reserve last year, now appears more robust. More officials are worried that this resilience could lead to sustained inflation rates above the 2% target. At the same time, the surge in oil prices related to the Iran conflict has shifted the Federal Reserve’s focus from the economy to inflation. The Federal Reserve rarely faces such a unique sticky inflation situation.
The monetary policy report released by the Federal Reserve on July 10 also shows that wage growth aligns roughly with the 2% inflation rate. This is the first time in the half-yearly report in the past five years that such an assessment has been made since the inflation spike.
Timiraos believes that the June Consumer Price Index (CPI) data scheduled for release on July 14 could change the policy direction. If core inflation data (excluding volatile food and energy items) shows strength, it will provide evidence for the hawks, proving that price pressures need to be addressed; if the data is moderate, it will reinforce the Fed’s reasons for “wait and see.”
He suggests that instead of a full rate hike, the Federal Reserve could opt for a modest adjustment by reversing some rate cuts from last year, then pause the hikes and reassess the market conditions. Given Warsh’s rare public stance on his policy leanings, the July monetary policy meeting becomes crucial in terms of how he will steer the Federal Reserve in his first major decision.
Inflation, a key factor in the Federal Reserve’s policy orientation, according to the latest Goldman Sachs research, indicates that the U.S. is likely to be the first to be hit by an inflation wave triggered by Artificial Intelligence (AI).
Goldman Sachs estimates that due to supply constraints, prices of critical components like memory chips and semiconductors are being driven up. AI is causing an annual increase in the U.S. core Personal Consumption Expenditures (PCE) inflation rate (the preferred inflation gauge of the Federal Reserve) by about 20 basis points. By the year-end, this inflation pressure is expected to more than double, pushing up the core PCE by over 50 basis points.
With the boost in demand for AI hardware, memory chip prices have soared. According to data from computer hardware service company Pangoly, the average price of an 8GB DDR5 memory module climbed to around $148 last week, more than triple the average price of $35 from the same period last year.
The minutes from the Federal Reserve’s June meeting released last week indicated that AI investment was listed as one of the three major factors driving inflation, alongside the Iran conflict and tariffs.