Fed chief Kevin Warsh says inflation risks have dipped – but keeps quiet on rate hikes

• Warsh reaffirmed the Fed's 2% inflation target but declined to signal policy direction, saying 'I'm not going to make a judgment now' on whether rate hikes are needed despite elevated inflation risks from higher energy prices and AI infrastructure buildout
• Traders increased odds of a July 29 rate hike to 30% from 6% a month prior, though markets still favor holding rates in the current 3.5% to 3.75% range pending Thursday's June jobs report
• The Fed's June 'dot plot' showed 9 of 19 officials expect at least one rate hike by year-end, up from just one in March, while Warsh announced one of his new task forces will 'revisit' the forward guidance tool

Summary

Federal Reserve Chairman Kevin Warsh indicated that inflation risks have declined in recent weeks but declined to commit to future rate action during his first appearance as chair at a European Central Bank conference in Sintra, Portugal. While reaffirming the Fed's commitment to its 2% inflation target, Warsh emphasized he would not prejudge upcoming policy decisions, signaling a more reserved communication approach than his predecessor.

Key Market Data:

• Traders now price in a 30% probability of a rate hike at the July 29 Fed meeting, up sharply from 6% a month ago (CME FedWatch)
• Current interest rate range: 3.5% to 3.75%
• Dow Jones rose 0.3% (150 points); S&P 500 up 0.1%; Nasdaq down 0.2% following remarks
• Nine of 19 Fed officials project at least one rate hike by year-end, according to recent "dot plot" projections

Economic Context:

Higher energy prices due to conflict in Iran and a resilient labor market have shifted the economic landscape since last year when Warsh advocated for faster rate cuts. Economists warn that AI data center expansion could sustain elevated inflation, refocusing attention away from employment concerns.

Market Implications:

The June jobs report, due Thursday, could strengthen the case for rate increases if employment data comes in strong. Gold prices ticked up after their worst quarter in 13 years, while Citigroup reduced bitcoin and ether forecasts, citing liquidity constraints from AI IPOs.

Warsh also announced that one of five newly created task forces will review the Fed's controversial "dot plot" projections, which he suggests will continue only temporarily as the central bank reassesses its communication strategy.