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.
As many Americans struggle to make ends meet, Federal Reserve Chairman Kevin Warsh has pledged to bring inflation back to its 2% target, but it remains unclear how the central bank plans to reach its goal ahead of its July meeting.
The Fed often finds itself at a crossroads as it attempts to balance its dual mandate of maximizing employment and stabilizing prices. The company has two main tools it uses to address both: its balance sheet and its interest rate benchmark, the federal funds rate. The Fed typically raises its target range for interest rates to control inflation and lowers rates to stimulate the job market.
Inflation accelerated for three months before slowing in June, but some forecasters say it could rise again amid renewed hostilities between the United States and Iran. And after three months of positive employment growth, U.S. employers added fewer people in June. The Fed needs to determine whether these recent fluctuations are just noise or the start of a new trend.
The Fed may also be at a crossroads in fulfilling Mr. Warsh’s promise of price stability to American consumers. Many Americans don’t want interest rates on credit cards and personal loans to rise, but they also don’t want prices to continue rising. Raising the Fed’s benchmark interest rate may help curb inflation, but it would also make borrowing more costly.
Dean Lulkin, chief executive of small business lender Cardiff, said Mr Warsh’s refusal to provide forward guidance made it difficult to predict the outcome of the July meeting.
“Warsh remains an enigma,” Ryulkin said. “No one really understands whether he means it or what he means by what he says. Until we get some more data on this Warsh Fed, I think everyone is confused.”
Amid all the uncertainty, many forecasters are divided, but they expect the Federal Open Market Committee to keep its benchmark interest rate unchanged in the range of 3.5% to 3.75% at the end of its two-day meeting on July 29th.
There are promises to reduce inflation, but no promises to increase inflation. why?
For five years, U.S. consumers have faced inflation above the Fed’s 2% goal. “Inflation is a choice,” Warsh said in Congressional testimony this month, telling lawmakers that inflation would not last forever. Although the Fed cannot directly control prices at grocery stores and gas stations, Warsh has repeatedly said he believes it is the Fed’s job to ensure that price increases do not spread throughout the U.S. economy.
“If we get policy right, and I can guarantee you that we will, the inflation surge of the past five years will be a thing of the past,” Warsh told senators on July 14.
Still, there are several reasons why Fed policymakers are in no rush to raise rates at their July meeting.
Traders began betting on interest rate hikes as consumer inflation rose year-on-year to 4.2% in May from 2.4% in February. But June’s slowdown to 3.5% and weak jobs data gave reason for pause. Headline inflation fell due to a 9.7% drop in gasoline prices, but “core” inflation, which excludes volatile food and energy prices, also fell in June. This means that the slowdown cannot be ignored solely as a result of the temporary ceasefire.
“Surprisingly, it was a pretty good report overall,” said David Royal, chief financial and investment officer at financial services firm Thrivent.
The July meeting also comes amid court-ordered tariff refunds, new tariff announcements by the Trump administration and escalating fighting in the Iran war, all of which will have an impact on the economy.
Hiking, cutting, or pausing?
Depending on who you ask, the Fed should do all three.
Warsh told lawmakers he expected another “good family battle” at the July meeting after FOMC members diverged on the best direction for interest rates in June. Mr. Warsh did not provide his own outlook, but eight members believe the Fed remains stable in its range, with nine saying there is room to raise rates and one saying there is room to cut rates by the end of 2026.
“Most participants mentioned a scenario in which inflationary pressures dissipate and inflation soon begins to return to 2%,” notes the minutes of the June meeting. “However, most participants also pointed to scenarios in which inflation remains high due to strong AI-related demand, the Middle East conflict, or the impact of tariffs, while labor market conditions remain stable.”
After the June meeting, some voting members of the FOMC appeared to be open to raising interest rates. Federal Reserve President Lisa Cook said on July 15 that she would wait “a little bit more time” but was prepared to take action unless inflation begins to slow, adding that she believes the risks remain “heavily biased” toward higher inflation.
“Taking a hard look at inflation until it melts in front of our withering gaze is not an option,” Fed Director Christopher Waller said on July 13, ahead of the release of the June inflation report.
After the policy announcement, White House Economic Council Director Kevin Hassett said the Fed had no “excuse” to raise rates and that he would start expecting rate cuts if inflation continued to slow.
“If you look at the data, you can see there’s no excuse to raise rates at all right now,” Hassett told CNBC on July 15. “I think one or two more reports like this will make them think otherwise.”
Where are interest rates heading?
The U.S. Federal Reserve will keep interest rates unchanged for the rest of the year, according to the median forecast of economists compiled by Reuters. However, when asked a separate question about the possibility of a rate hike in 2026, the majority said it was “high,” a reversal from last month when most saw it as “low.”
“It’s been a long time since I was actually surprised by a Fed decision,” Royal said, adding that he expects the Fed to make more surprising moves under Warsh than under former Chairman Jerome Powell.
But he added that policymakers may hold off on action until they hear from five task forces set up by Mr. Warsh to advise on monetary policy. They plan to submit their recommendations by the end of this year.
Mr. Warsh has repeatedly publicly expressed his independence from politics, but both Mr. Royal and Mr. Ryulkin said they may also be considering the potential impact of rate hikes ahead of this year’s midterm elections.
“Raising rates heading into the midterm elections is almost suicidal for the Republican Party, and you have to believe that Kevin Warsh understands that,” Ryulkin said, adding that consumers will likely blame the party in power. “If you’re in Congress, you can’t imagine telling Americans right now, maybe three or four months before the midterm elections, that we’re going to raise interest rates on credit cards and auto loans.”
President Donald Trump has been pressuring policymakers to lower interest rates during his second term, but Mr. Warsh has said little about the Fed since he took over as chairman in late May. When policymakers left interest rates unchanged in June, President Trump responded, “Anything goes.”
Contact Rachel Barber rbarber@usatoday.comFollow her on X @rachelbarber_and subscribe to her newsletter Making More of Your Money here.
