Inflation Cooldown Meets Fed Chair’s First Testimony

Hours before Kevin M. Warsh’s inaugural congressional testimony as chairman of the Federal Reserve on Tuesday, the Consumer Price Index showed the overall inflation rate falling to a three-year high-season low. The “core” CPI, which excludes food and energy, was flat for the month, pulling the year-over-year rate down to 3.5 percent. A simultaneous drop in wholesale prices reinforced the moderation, easing immediate pressure for a rate hike at the July 28-29 Fed meeting.

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Fed governors signaled caution. Christopher J. Waller warned that a “hot” report would have forced the Fed to consider raising rates “in the near term.” Lisa Cook said she would be “prepared to act” if disinflation did not appear soon, while John Williams of the New York Fed cautioned that persistent inflation would require an adjustment of rates. Lorie Logan, president of the Federal Reserve Bank of Dallas, called for “modestly higher” rates to finish restoring price stability, suggesting a debate at the September 15-16 meeting.

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Tom Porcelli, chief economist at Wells Fargo, argued the Fed’s tools are limited against supply-side shocks, noting that “if these supply-side shocks are impacting inflation, then there’s very little the Fed can actually do.” Omair Sharif of Inflation Insights warned that airfares, hotel rates, auto insurance, used-car prices and wireless services could create “bumps in the road ahead for core inflation.” John Roberts highlighted artificial-intelligence-driven demand for semiconductors and servers as a “wild card” for price pressures.

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David Wilcox, senior fellow at the Peterson Institute for International Economics, argued that the benign data merely “lengthened the runway” for Warsh and his colleagues, implying they will eventually need to “tighten the stance of policy.” Derek Tang of LHMeyer warned that Warsh has “put his own reputation on the line” and that his opaque communication makes it hard to gauge the threshold for future rate hikes.

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• “Unquestionably, the more-benign-than-expected data lengthened the runway available to Warsh and his colleagues to consider the situation and mull over whether they’re really going to cross the Rubicon of raising the funds rate,” — David Wilcox, senior fellow, Peterson Institute for International Economics

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• “Whether that’s inflationary or not, that’s up to the Federal Reserve,” — Kevin M. Warsh, Federal Reserve Chairman

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• “He has put his own reputation on the line to say, ‘I am going to turn this ship around,’” — Kevin M. Warsh, testimony to Congress

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• “If these supply-side shocks are impacting inflation, then there’s very little the Fed can actually do about that,” — Tom Porcelli, chief economist, Wells Fargo

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• “prepared to act.” — Lisa Cook, Fed governor

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