Warsh to testify July 15 as Fed faces inflation, rate path questions

Federal Reserve Chair Kevin Warsh will testify before the Senate Banking Committee on July 15, his first public policy remarks since taking office as deepening divisions over inflation and the interest-rate path split the committee.

"The markets are pricing no change for at least six months, and maybe not until the middle of next year," said Chester Spatt, a finance professor at the Tepper School of Business at Carnegie Mellon University.

The June FOMC meeting minutes, released after Warsh's first gathering as chair, showed that "a few" officials saw a case for raising rates while inflation concerns mounted across the committee. The decision to hold the fed funds rate at 3.5% to 3.75% drew four dissents — the most since 1992 — with three regional bank presidents objecting to the inclusion of an easing bias and one governor favoring a quarter-point cut.

The July 15 hearing will give markets their first direct read on Warsh's policy leanings. Investors will parse his remarks for clues on whether the Fed's next move is more likely to be a cut or a hike, with OIS markets pricing roughly a 40% probability of a reduction by December, according to CME FedWatch data.

Warsh, a former Fed governor under President George W. Bush, was confirmed by the Senate Banking Committee in April and sworn in after Jerome Powell's term as chair expired May 15. The last time a new Fed chair faced a similarly divided committee was in 2018, when Powell took over with the fed funds rate at 1.25% to 1.5% and the committee broadly united on a gradual hiking path.

Inflation Concerns Mount as Labor Market Cools

The June minutes revealed that "many" participants saw upside risks to inflation, citing the conflict in the Middle East as a source of energy-price uncertainty. Higher oil costs have pushed up headline readings, complicating the return to the Fed's 2% target. At the same time, the labor market has softened, with job gains remaining "low, on average" and the unemployment rate little changed, according to the FOMC statement.

The divergence between sticky inflation and a cooling jobs market creates a classic central bank dilemma. If Warsh indicates a willingness to tolerate above-target inflation to support employment, bond yields could fall and equities could rally. If he emphasizes the need to finish the job on inflation, the opposite reaction is likely.

Market Pricing Points to Extended Hold

OIS markets have priced out any rate move for the next two meetings, with the first full 25-basis-point cut not fully discounted until December, according to CME FedWatch data. The 2-year Treasury yield has traded near 4.2% since the June decision, while the S&P 500 has fluctuated within a 3% band as investors await clarity.

The last time the Fed held rates steady with this level of internal dissent was in 2006, when the committee maintained a 5.25% rate for over a year before cutting in September 2007. That period preceded the global financial crisis — a historical parallel that highlights the stakes of the current policy debate.

This article is for informational purposes only and does not constitute investment advice.