Warsh faces Senate grilling as inflation cools to 3.4% in June

Federal Reserve Chair Kevin Warsh faced a hostile Senate Banking Committee on Wednesday, defending his independence and fielding accusations of ethical lapses as a cooler-than-expected June CPI print gave the central bank breathing room on rates.

"The tone that you are setting is one that seems to invite corruption and that's going to be a real problem," Senator Elizabeth Warren, the Massachusetts Democrat, told Warsh during the hearing.

The confrontation came hours after the Labor Department reported headline CPI rose 3.4% month-over-month in June, down from May's 4.2% reading, with core inflation flat. Futures traders priced an 83% probability the Federal Open Market Committee holds rates steady at its July 28-29 meeting, per the CME Group FedWatch Tool, though a September hike remains on the table at 63% probability.

The Fed's rate-setting committee has kept the benchmark federal funds rate at 3.5% to 3.75% for three consecutive meetings, but three members dissented at the last gathering — a warning shot to Warsh that rate cuts won't come easily even as inflation shows signs of easing.

Warren pressed Warsh on two fronts: his personal investments totaling at least $100 million and a controversy involving Fed Vice Chair for Supervision Michelle Bowman. Bowman attended a private dinner hosted by Bank of America during the FOMC's blackout period last month. Warsh said he had not discussed the matter with Bowman to avoid prejudging a potential inspector general review.

"I wasn't at the meeting, I don't know the facts," Warsh said. "But I'd be very interested in the fact-finding being done by the independent inspector general."

On his divestment of assets — which include stakes in Polymarket and SpaceX — Warsh declined to specify who purchased the holdings but said he had sold nearly everything and rolled the proceeds into cash and T-bills. He promised to sell all assets within 90 days of being sworn in.

Task Force Picks Draw Scrutiny

Democratic senators also questioned Warsh's selection of outside experts for his five monetary policy review task forces. The employment and productivity task force includes venture capitalist Marc Andreessen, economist Charles Jones — who works for AI firm Anthropic — and Microsoft executive Asha Sharma. Senator Tina Smith, a Minnesota Democrat, argued the group was stacked with AI industry insiders.

"Can you understand why a task force that is led by people, in large part, who are likely to get richer by AI might not be the most credible people to folks on the ground who are doing the work who are worried what impact this AI is going to have on their jobs?" Smith said.

Warsh countered that Jones's research has featured labor displacement from past technological shocks and that final policy decisions rest with the 19-member FOMC.

Rate Path and Inflation Outlook

The benign June CPI report gives Warsh room to avoid a near-term rate hike. "The very benign June CPI inflation report gets Warsh off the hook in terms of pressure to hike near-term," Evercore ISI economists wrote in a note.

Still, longer-run inflationary pressures persist. Labor shortages in industries with high shares of immigrant workers and sustained higher prices for foods such as beef and veal continue to push prices higher, said Bill Adams, chief economist at Fifth Third Commercial Bank. "The Fed will need to see more good news on inflation to hold off on interest-rate hikes in the rest of the year," Adams said.

Warsh, who has been critical of the Fed's handling of the 2021-22 inflation surge — the worst in four decades, when prices hit 9.1% — said the central bank has "more work to do" on inflation. He has called for limiting the Fed's communications tools, arguing that quarterly rate forecasts have made it harder for officials to shift policy.

The Fed is also grappling with a 50% spike in gas prices caused by the war in Iran, which pushed headline inflation to 3.8% in April. Warsh said the central bank would look past temporary supply-driven price increases, a stance that drew criticism after the Fed followed the same approach during the pandemic-era supply chain crisis.

The last time the Fed used language similar to Warsh's "more work to do" framing was in early 2023, when then-Chair Jerome Powell signaled the central bank would keep rates elevated. The S&P 500 fell 5% over the subsequent two months as the Fed delivered two additional quarter-point hikes.

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