Fed Chair George Warsh’s House Testimony: Inflation, Data-Driven Policy, and AI
Federal Reserve Chairman Kevin Warsh testified before the House of Representatives about data-based monetary policy choices and other issues affecting the U.S. economy.
In two Congressional hearings dominated by questions about artificial intelligence and central bank independence, Federal Reserve Chairman Kevin Warsh stuck to his simple resolve: He plans to return inflation to the Fed’s 2% goal.
Lawmakers asked Mr. Warsh how he could ultimately lower prices for consumers when the Fed has little control over some of the things that are pushing them up, such as the Iran war. While the Fed can’t directly lower prices at grocery stores and gas stations, it does have tools at its disposal, such as its balance sheet and benchmark interest rates, to prevent price increases from spreading throughout the U.S. economy.
“Inflation is a choice. The members of this committee do not tolerate a sustained rise in inflation and share our unwavering commitment to restoring price stability,” Warsh said in his opening remarks to members of the House and Senate on July 14 and 15, respectively.
The debate also highlighted lawmakers’ concerns about how the AI investment boom will affect jobs, whether Mr. Warsh will prioritize ordinary Americans over Wall Street, and the task force he created to help restructure the central bank.
Although Warsh did not provide any insight into the Fed’s next interest rate decision on July 29, a continuing theme for the new Fed chair, his testimony to Congress did provide hints about where he thinks the U.S. economy and the Fed are headed.
Can the Fed control inflation?
Year-over-year inflation, or the rate of increase in the prices of consumer goods in the United States, has remained high for the past five years. It rose sharply after the start of the COVID-19 pandemic, reaching 9% in 2022, but has since started to slow.
It has been on an upward trend since the Iran war began on February 28th. The oil price rose from 2.4% in February to 4.2% in May, mainly due to higher gas prices due to the closure of the Strait of Hormuz, which limits global oil supplies. It slowed to 3.5% in June, the same month the U.S. and Iran reached a temporary cease-fire agreement that President Donald Trump later declared “over.”
At a July 15 hearing, Sen. John Kennedy (R-Louisiana) asked Warsh whether this inflation was permanent or temporary.
“It won’t stay on my watch forever,” Warsh replied.
James Knightley, chief international economist at ING, said in a report to USA TODAY that Warsh’s commitment is not all that surprising since maintaining price stability is one of the Fed’s primary roles. The other is to maintain maximum employment.
The Fed typically raises interest rates to control inflation.
“If you take[Warsh’s]statements at face value, it clearly means that as long as inflation is above target, you can use hammer and tongs to raise interest rates as much as you need to,” said Skanda Amarnath, executive director of Employ America and a former New York Fed analyst. “I actually don’t think that’s true. I don’t think he’s going to take every opportunity to raise rates because there are trade-offs.”
Is monetary policy inconsistent with other U.S. policies?
Rep. Sean Kasten (D-Ill.) asked Warsh how effective the Fed’s monetary policy can be when it conflicts with policies enacted by the Trump administration.
“Because I don’t really understand the theory or the case that interest rates will reverse tariffs or that interest rates will reverse high oil prices,” Kasten said. “Do we have the tools to fight them?”
“We have powerful tools,” Warsh replied, adding that the Fed takes into account changes in trade policy, immigration policy and military conflicts when making decisions.
“It often affects prices in the short term,” Warsh said. “Our job is whether these prices eventually diffuse in the short term.”
Warsh was referring in part to the Trump administration’s crackdown on immigration when Sen. Thom Tillis (R-North Carolina) asked him whether net zero immigration would hurt U.S. economic growth.
“Immigration policy is determined by you and your administration,” Warsh said, adding that those decisions affect the country’s potential gross domestic product, the result of the number of hours worked and productivity of its citizens.
Who is the Fed’s special committee for?
Lawmakers also asked Mr. Warsh for more information about communications, balance sheet policy, data sources, the inflation framework, and the special committee he established to advise Fed policymakers on productivity and employment.
Warsh called the Bureau of Labor Statistics’ Consumer Price Index and Producer Price Index “imperfect measures” of underlying inflation after two reports this week showed inflation slowed in June. He said he hopes the Data Inflation Framework Working Group will give agencies like the BLS ideas to “do a better job in an evolving economy.”
Warsh’s choice to lead the Productivity and Employment Task Force has attracted much attention. They are Andreessen Horowitz co-founder and general partner Marc Andreessen, Stanford economics professor Charles Jones (currently on leave at Anthropic), and Microsoft executive vice president and Xbox CEO Asha Sharma.
“Do you understand why a task force led by people who are likely to get rich from AI is not the most trusted person for people on the ground who are worried about how this AI will affect their jobs?” asked Sen. Tina Smith, D-Minnesota.
“I think before we draw any conclusions, we’re going to hear from the people who are going to be affected. We’re going to hear from employers who have been hit by a technology shock and their workforce is disrupted,” Warsh said. “I think they are incredibly talented, and we will certainly consider both parts of our dual mission in light of their accomplishments.”
Why is Warsh optimistic about AI?
While Americans fear AI-related layoffs, Warsh remained optimistic that the technology will make the U.S. richer and more productive in the long run.
His comments came days after more than 200 economists and researchers signed a joint statement calling on policymakers to “act now” and address the risks posed by AI, including mass job displacement.
“I think this will lead to long-term job creation, but will it have a disruptive impact and put some people’s jobs at risk because of new technology?” Warsh said. “I can’t offer any guarantees or comfort about that.”
He added that with large-scale AI investments in the private sector, he is optimistic that the U.S. economy will eventually benefit from large-scale adoption.
“If the private sector puts in this much capital, you should see something bright at the end of the rainbow,” Warsh said. “I’m sure they expect a very good return on investment. … I tend to think that the multiplier for private investment is much higher than one.”
Questions about Fed independence
Democratic lawmakers continue to question Mr. Warsh’s independence from Mr. Trump, who seeks unprecedented influence over the central bank during his second term.
“The president has never tried to influence the conduct of monetary policy before I took office and before I raised my right hand,” Warsh said, adding that he follows the data and the law. “If he tries to do that, I’ll keep my head down and keep doing my job.”
Mr. Warsh and other members of the Federal Open Market Committee voted to keep the benchmark interest rate unchanged after his first meeting as chairman in June. What was President Trump’s reaction at that time? “Anything.”
“The biggest unanswered question from all of this is kind of: How can we be confident that the positions that Chairman Warsh takes and the decisions he ultimately makes are motivated by economic reasoning, evidence-based, data-driven analysis and not just this political shadow that looms large?” Mr. Amarnath added that Mr. Warsh’s insistence on relaxing forward guidance will not help calm people’s fears. “Frankly, that would have been a big problem no matter which option the Fed chair chose. But if you’re saying less, not more, I think it’s hard to shake that off.”
Contact Rachel Barber rbarber@usatoday.comFollow her on X @rachelbarber_and subscribe to her newsletter Making More of Your Money here.
