The Fed gets some wiggle room

When Kevin Warsh learned that his first semiannual monetary policy report to Congress would be the same day that June CPI arrived, you just know he groaned in frustration. Chances were high it would be a bad inflation reading thanks to the disruption of crude oil from the Middle East—and then he’d have to explain what he’s going to do about it to the House of Representatives.

Instead, Warsh got an unexpected win: CPI fell for the first time since 2020, dropping 0.4% from May as gas prices experienced their biggest monthly plunge since 2022, bringing annual headline inflation down to 3.5%. If you exclude volatile food and energy prices, core CPI remained flat at an annual rate of 2.6%.

“The Fed’s number one objective is to get monetary policy right—or as near to it as we possibly can. That is our clear and constant aim, the star we steer by,” Warsh said in a prepared statement on Capitol Hill today. “And if we get policy right—and we will—the inflation surge of the last five years will be a thing of the past.”

Hike hype

Today’s inflation report was a step in the right direction for Warsh, and for the market. Investors have grown increasingly worried that, in order to curb inflation, the Fed will be forced to hike interest rates as soon as its next meeting on July 29. Some even see multiple rate hikes ahead—Bank of America leads the pack with three expected increases this year.

In his testimony today, Warsh specifically avoided committing to additional hikes this year even if inflation remains above the Fed’s 2% target. And the latest numbers seemed to put some of those fears to rest: The CME FedWatch tool showed that the odds of interest rates staying the same after the Fed’s next meeting rose from 58% to 83%, while the chances of a rate hike fell from nearly 42% to 16%.

That said, Warsh made it clear to Congress that the job isn’t done yet.

“While I reviewed the data that came out this morning on CPI and it was positive relative to expectations, I’m not for cherry picking,” Warsh said. “I am not going to show up and say mission accomplished, and what I’d say is there’s plenty of work to do.”

Warsh’s Capitol Hill visit will continue tomorrow when he chats with the Senate, but for today at least, the new Fed head got to enjoy a victory.—MR