Kevin M. Warsh reiterated his commitment to bringing down inflation at his first congressional hearing since becoming chairman of the Federal Reserve. However, he has yet to indicate whether he supports higher interest rates to achieve that goal.
Mr. Warsh on Tuesday told lawmakers on the House Financial Services Committee that the central bank will set policy “right” such that “the inflation surge of the last five years will be a thing of the past.”
A pledge to deliver price stability was established last month at Mr. Warsh’s first policy meeting in the top job, at which officials voted unanimously to hold rates steady at a range of 3.5 percent to 3.75 percent.
“The members of our committee have no tolerance for persistently elevated inflation,” Mr. Warsh told lawmakers at Tuesday’s hearing. “And we share a resolute commitment to restoring price stability.”
Mr. Warsh’s first of two days of testimony this week coincided with the release of the latest measure of inflation, the Consumer Price Index report. Inflation in June cooled sharply as falling energy prices stemming from a temporary truce in the war with Iran dragged down the overall index. “Core” inflation, which strips out volatile food and energy items to give a better sense of the underlying trend, also eased by more than expected.
The data, which is among the final major releases ahead of the Fed’s next meeting at the end of the month, is unequivocally good news for the Fed. But it could prove to be short-lived now that fighting has resumed between the U.S. and Iran and oil prices have again jumped higher.
How inflation evolves in the near-term will have direct implications for how some officials think about the urgency around raising rates to get inflation back to the Fed’s 2 percent target. That target has been missed for half a decade.
The Fed’s focus on inflation stems partly from the fact that the labor market is on solid footing, as Mr. Warshhighlighted on Tuesday. “We’re seeing relatively few layoffs, only slight variance in the rate of job vacancies, and solid growth in nominal wages,” he said.
Investors expect roughly even odds of a rate increase at the central bank’s meeting on July 28-29 — a divergence that has been further fueled by Mr. Warsh’s unwillingness to provide explicit signals about the future path for policy.
Other Fed officials have instead filled the gap.
Christopher J. Waller, a governor, said on Monday that he would need to see several months of lower inflation data to feel confident in the trajectory of price pressures. If that pans out, he said, it would make sense for the Fed to continue holding rates steady. “Hot” or stronger than expected inflation data would buttress the case for imminent rate increases, he added.
Last week, John C. Williams, president of the Federal Reserve Bank of New York, suggested that monthly readings above 0.2 percent in the second half of the year for the Personal Consumption Expenditures price index, once volatile food and energy items are excluded, would point to a more persistent inflation problem that may necessitate the Fed taking action. That “core” index, which the Fed closely monitors, rose 0.3 percent in May.
An overarching concern for Fed officials is not just price pressures stemming from the war with Iran, which pushed inflation to a three-year high this summer. But it is price gains stemming from soaring demand fueled by the build out of infrastructure for artificial intelligence. Prices for semiconductors, computer chips, servers and other items related to the proliferation of the technology have risen sharply this year.
Mr. Warsh has acknowledged these rising prices, but he has also previously argued that higher productivity in its wake will over time help to keep a lid on inflation even as economic growth accelerates. On Tuesday, he told lawmakers that the Fed is “monitoring the implications for inflation and the labor market,” while striking an upbeat tone about the potential economic gains.
“We don’t know the extent to which the economy will benefit from the A.I. build out,” he said. “Yet it seems inevitable that what is now called ‘A.I. investment’ will soon be called just ‘investment.’”
Mr. Warsh has directed a group of external advisers, which include the venture capitalist Marc Andreessen, to lead a task force looking into how A.I. is impacting productivity and the labor market. It is one of five such groups that he has created to examine issues core to the Fed, forming the backbone of his plans to enact regime change at the institution.
Task forces related to how the Fed communicates, its $6.7 trillion portfolio of government bonds and mortgage-backed securities, and the data sources upon which it relies have also been created, as well as one focused on the central bank’s understanding of inflation.
Mr. Warsh’s goal is for the task forces to complete their work by the end of the year, after which policymakers will weigh in on how to establish proposed changes.
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