The sun was shining on Fed chairman Kevin Warsh today as he delivered his first Congressional monetary report on a day when the consumer price index unexpectedly fell for the first time in six years. And that takes Fed rate cuts off the table.
As Mr. Warsh said it was too soon to declare “job done,” but he vowed to beat inflation and get monetary policy right when he appeared before the House Financial Services Committee. As he put it: “63 months of inflation above the target has been an unfair burden. It has been a tax on the American people and businesses. We plan to eliminate that tax if that means we need a change of government in policy and we need a new consideration of procedures, some of which have worked, some of which have not worked, that is what we intend to do”
The new Fed chairman has only been in office for two months, but energy, precious metals, and farm commodity prices have already started to fall. Mr. Warsh aims to be a reformer at the central bank, and has commissioned a number of high-level forces to report later in the year on “regime change,” as he puts it.
Yet one thing he understands better than his predecessor is that inflation is a matter of monetary policy caused by bad choices and a lack of resolve to restore price stability and perhaps return to the 2 percent target. Futures markets took at least one more Fed rate hike off the table after the dovish CPI report. There is still another rate hike with the price maybe sometime this fall, but I doubt it.
When you look at the core numbers that exclude food and energy, which is what most Fed officials are focused on, the monthly numbers are down slightly, with even a 12-month change of just 2.6 percent. The maximum number of all items was lower in May than in April, and in June it actually decreased by four-tenths of one percent.
Yes, energy in general and fuel in particular have lowered the index. But it is also worth noting that commodity prices have almost disappeared throughout the year, except for food and energy. The much-heralded inflation that would have been reflected in commodity prices never materialized, or when it did, it was short-lived.
Meanwhile, the top figure also fell by 1.1 percent in June. Services were down in June. New and used car prices have dropped. And Mr Warsh is right to tell the public that the job of price stability is far from over. However you also know that when they reliably return to 2% or less inflation, interest rates will drop from their weight and will stay low.
In addition, he painted an optimistic picture of the economy with particular reference to investment in growing business. In other words, he also argues that you can have strong economic growth with low inflation. And he stuck to his guns on the positive impact of all kinds of advanced technology investments, from AI through quantum computing, space, and who knows what else. You know what? If you listen to Mr. Warsh and see what the first results are – even the Fed chairman can have his cake and eat it too.
