From Main Street to Wall Street, households and businesses had been grappling with higher prices in goods and services for months due to sticky inflation and tariff trade deals when the Iran War began at the end of February.
Higher energy costs and the AI demand boom added to price surges. The wobbly Middle East peacefire deal has sent crude oil prices down to prewar levels but to date, the models and measures of inflation haven’t followed in that direction.
Nor have your grocery bill or healthcare costs.
But Federal Reserve Chair Kevin Warsh said July 1 that inflation risks have come down in recent weeks although he didn’t offer data or other numbers to support his argument.
Instead, speaking at the European Central Bank’s annual gathering of international policymakers and economists in Sintra, Portugal, the new Fed chair doubled down on his hawkish pledge last month that the U.S. central bank will focus on delivering “price stability.”
“Expectations of inflation over the first four weeks of this period, they’ve come down. Inflation risks have come down,” Warsh said, deflecting hints on whether the Fed will raise benchmark interest rates at its next policy meeting later this month.
Warsh repeats Fed pledge to lower inflation, ‘price stability’
Warsh appeared on a panel with Christine Lagarde, the president of the European Central Bank; Andrew Bailey, the governor of the Bank of England; and Tiff Macklem, the head of the Bank of Canada.
May Headline Personal Consumption Expenditures, the Fed’s preferred inflation gauge, showed a 4.1% jump from the previous year with core prices up 3.4%, excluding food and energy. The year-over-year hike was the highest in three years.
While Warsh repeated the message from his first press conference as Fed chairman last month that the central bank will deliver price stability, he also stuck to his position to drop forward guidance to markets about possible interest-rate paths.
Warsh, as have other world central bankers like Lagarde, say forward-uidance language forces central banks to adhere to a certain course and make it difficult to adjust quickly to economic changes.
Warsh emphasized the Fed’s commitment to getting inflation back down to its 2% target — a level it has missed for the last five years.
“If there were people in households or the business sector or the financial markets who thought that this central bank was going to be comfortable with an inflation objective above 2%, well, I guess they’d be disappointed,” he said.
“We’re going to deliver price stability in the U.S.,” Warsh said, adding that “the tactics, the strategy and the rest, that’s still to come.”
FRED Economic Data/TheStreet
Fed’s dual mandate requires a tricky dance
The Fed’s dual mandate from Congress requires maximum employment and stable prices.
- Lower interest rates support hiring but can fuel inflation. This risks fueling further inflation, potentially leading to an inflationary spiral.
- Higher rates cool prices but can weaken the job market. This increases the cost of borrowing and further stifles economic activity.
Fed holds interest rates steady thus far this year
The rate-setting Federal Open Market Committee voted unanimously last month to hold its benchmark Federal Funds Rate target in a range of 3.5% to 3.75%.
Investors are now pricing in at least one 25 basis point rate hike by year-end.
Policymakers had cut rates by 25 basis points at its last three meetings of 2025 to shore up the softening labor market.
These “insurance” cuts stopped after the majority of policymakers decided the risk from higher prices was outweighing signs that the jobs market was stabilizing.
Related: Inflation flips Wall Street’s Fed interest-rate bets
The funds rate is the interest rate at which banks lend balances at the Federal Reserve to other banks overnight.
A change in the funds rate triggers moves in borrowing costs ranging from credit cards to auto loans to mortgages.
Top bank forecasts multiple Fed rate hikes on the horizon
BNP Paribas Chief U.S. Economist James Egelhof said he expects the Fed to zap those 2025 cuts and raise rates three times in succession beginning in December.
Egelhof, who worked at the New York Fed, told The New York Times that this forecast is based on his perspective that inflation is “chronically stuck at a moderately elevated level.”
Hence the central bank’s monetary policy is no longer restraining the economy.
“We think Warsh is building a case with markets and the public for better-anchored inflation expectations built around his own personal credibility and a renewed institutional credibility for the Federal Reserve,” Egelhof said. “After over five years of an inflation overshoot, the words will need to be supplemented with action.”
Warsh assesses the timeline to shrink Fed balance sheet
Warsh has long argued, as have many Fed watchers, that the Fed’s $6.7 trillion balance sheet needs to shrink down to pre-pandemic levels.
He estimated it would take more than 18 weeks to reduce it into a smaller portfolio.
Those changes will come from a FOMC vote that would also be “well deliberated publicly,” Warsh said.
Some economists argue that the Fed must reduce its massive balance sheet to help curb stubborn inflation and limit financial market distortions.
By unwinding trillions of dollars in asset holdings, the Fed also restores flexibility to help combat future economic downturns like a recession, a hike in unemployment rates or reduced consumer and business activity.
Related: Fed’s Warsh leaves markets guessing on rate hikes