Fed Chair Warsh: AI Price Pressures May Not Be Inflationary

Federal Reserve officials welcomed fresh data showing U.S. consumer price inflation cooled to 3.5% year-on-year in June, down from 4.2% in May, but stressed that policymakers would need several more months of similar readings before gaining confidence that inflation is on a sustained downward path. Federal Reserve Chair Kevin Warsh and Chicago Fed President Austan Goolsbee indicated that while the case for a near-term interest rate hike has weakened, policymakers are not yet ready to conclude that inflation risks have faded. Speaking during testimony before the House Financial Services Committee, Warsh described the latest Consumer Price Index (CPI) report as encouraging relative to expectations but cautioned against placing too much emphasis on a single month's data. Warsh did not indicate whether the remaining work on inflation would ultimately require another interest rate increase or simply a prolonged pause, maintaining the Federal Reserve's current stance of avoiding explicit forward guidance on future policy decisions.

The June CPI report showed U.S. consumer inflation slowed more than expected to 3.5% year-on-year, with headline prices falling 0.4% month-on-month versus consensus expectations of a 0.1% decline. However, core inflation, which strips out food and energy, was flat on the month versus expectations of a 0.2% increase, representing a negative print of -0.017% MoM to three decimal places. Annual headline inflation rate slowed to 3.5% from 4.2% while core inflation dropped to 2.6% from 2.9%. The details show gasoline prices fell 9.7% MoM, with education & communication down 0.8% MoM, used cars down 0.2%, apparel down 0.6%, and medical care falling 0.1%. Shelter, the largest CPI component at 35%, rose just 0.1%, while new vehicle prices were flat and other goods and services rose only 0.1%. The encouraging aspect is the breadth of the softness - it wasn't steep falls in one or two components that offset robust price increases elsewhere. Traders dropped their bets for a July rate hike after inflation data, released earlier on Tuesday, showed consumer prices declined in June for the first time in six years. Goldman Sachs economists noted that Warsh's remarks represented 'hints about his view on responding to high inflation caused by supply shocks.'

Warsh has announced five task forces — covering Communications, Balance Sheet Policy, Data, Productivity and Jobs, and Inflation Frameworks comprising external economists and business leaders who will independently review the broad conduct of monetary policy. During the June FOMC meeting — his first major public outing as Fed chair — Warsh made two significant and unconventional decisions: he did not disclose his rate forecast for the 'dot plot' and he shortened the forward guidance report. Both moves have left markets uncertain about the central bank's future direction, with Warsh raising concerns that he may alter how the Fed issues forward guidance, quarterly dot plots, and speeches from Fed officials. Warsh has adopted a more cautious tone on artificial intelligence, noting that while it may boost productivity, it is currently contributing to higher costs in areas such as software and infrastructure. Warsh has also avoided offering forward guidance and did not submit rate projections at the Fed's June meeting, showing no signs of imminent rate cuts despite Trump's repeated calls for lower interest rates. Warsh emphasized the Fed's independence, stating 'The independence of the Fed is sacrosanct,' and 'Credibility is bolstered if we are and are perceived to be independent,'** as he vowed to set policy based on data even if the president was pushing for lower borrowing costs. Warsh used the hearing to map out his broader agenda of shaking up the central bank by promising to deliver 'regime change' through five new task forces that will review and potentially reform key parts of the Fed's policymaking. 'Our job, my commitment to you, is to take sticky prices and to unstick them,' Warsh declared during his testimony.

Following the softer-than-expected CPI report, financial markets significantly reduced expectations of an imminent rate increase. Investors now see only about a 15% probability of a rate hike at the Federal Reserve's July meeting, while the odds of an increase at the September meeting stand at roughly 65%, reflecting growing confidence that inflation may be easing even as policymakers remain cautious. Market attention is now turning to the June Producer Price Index (PPI), due for release on Wednesday, which will provide a broader picture of inflation trends and help economists estimate the June reading of the Personal Consumption Expenditures (PCE) Price Index, the Federal Reserve's preferred inflation gauge. The Federal Reserve's next policy meeting is scheduled for July 28-29. Federal Reserve Governor Christopher Waller had also cautioned against reading too much into a single softer inflation report, saying several months of easing price pressures would be needed before concluding inflation was firmly on track toward the Fed's 2% objective. Warsh's most direct response yet to potential political pressure came when lawmakers asked about Trump interference, with Warsh stating he would 'continue to do my job' if faced with pressure from President Trump, echoing comments former Fed Chair Jerome Powell made when asked what he would do if Trump tried to fire him. New data on Wednesday showed an underlying gauge of producer price inflation was also softer than expected in June, suggesting broad-based inflation remained in check during the month, reinforcing the Fed's cautious stance on monetary policy.