Fed's Warsh calls June inflation data 'positive' but says 'mission not accomplished' on prices

The June inflation surprise

Fresh data released on Tuesday morning showed that US consumer price inflation cooled more than expected in June, falling to 3.5% on a year-over-year basis from 4.2% in May. Lower energy prices were the main driver. The report was considerably more benign than markets had anticipated and prompted traders to slash bets on a near-term rate increase. According to CME Group's FedWatch tool, the probability of a quarter-point hike at the July 28-29 meeting dropped from roughly 42% on Monday to just 12% after the data. The chance of a move by the September 15-16 meeting fell to about 53%, down from 75% a day earlier.

Warsh stays cautious

In his first appearance before the Republican-controlled House Financial Services Committee, Chairman Warsh acknowledged the improvement but refused to celebrate. 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; I'm not going to show up here and say 'mission accomplished,' Warsh said. He added that there was plenty of work to do and said he would feel more confident with additional data to inform decision-making.

This isn't a time for us to pass the buck to blame others. The Federal Reserve can and will deliver price stability.

Warsh maintained his stance against providing forward guidance and did not indicate whether the work ahead meant further rate hikes or simply holding the policy rate in its current 3.50%-3.75% range. He said he would ask colleagues to have a good family fight about the extent and timing of any future policy moves.

Goolsbee echoes the wait-and-see message

Chicago Fed President Austan Goolsbee reinforced the cautious tone in remarks to the Kenosha Area Business Alliance in Wisconsin. He called the CPI report surprisingly benign and encouraging but stressed that one month was not enough. I'm heartened by this CPI data today, but we need a lot more than one month to think that it is going well, he said. Goolsbee said he would feel a lot better after several months of similar readings. His comments underscored that the near-term rate path remains data-dependent and that the July meeting is unlikely to produce a hike unless subsequent reports shift the picture sharply.

The political backdrop

Warsh's relationship with President Donald Trump formed a persistent undercurrent during the three-hour hearing. At his May swearing-in, Trump had effusively praised his pick. On Tuesday, Democrats warned the new chair not to rely on last month's Supreme Court ruling as a shield for central bank independence. Warsh sought to draw a sharp line between the institution and its political environment. Outside the four walls of the Federal Reserve there's no doubt a lot of politics. My goal inside the central bank is for there to be no politics, he said. When asked what he would do if targeted personally, he replied, I could continue to do my job.

If we get policy right⁠ — and we will — the inflation surge of the last five years will be a thing of the past.

The chairman's initial steps in office have been read as establishing distance from the White House. Jon Faust, a former top adviser to Jerome Powell and now an economics professor at Johns Hopkins University, noted that if people were concerned Warsh would be a 'sock puppet,' those fears should have been gone after his first press conference and that his task force appointments really cement that view.

Balance sheet and task forces

Warsh also addressed the Fed's balance sheet policy, pledging that any future changes would be previewed, explained, and debated well in advance. I want to assure you that if there were a change in balance sheet policy, that we would preview it, explain it, debate it, and no changes in balance sheet policy would happen without good advance notice, he told lawmakers. Meanwhile, the task forces Warsh announced last week are drawing attention as a potential vehicle for broader institutional reform. The groups are stacked with well-known economists, corporate executives, and central bankers, a composition that analysts see as reinforcing his pledge to keep the Fed's work technocratic and non-ideological.

What comes next

The testimony continues Wednesday before the Senate Banking Committee, the panel that advanced his confirmation on a party-line vote in late April. That hearing could revisit the independence question more directly. On the data front, the June Producer Price Index is due Wednesday and will provide a fuller picture of wholesale inflation ahead of the July 28-29 Federal Open Market Committee meeting.