US Federal Reserve Chairman Kevin Warsh stressed that the June decline in inflation does not mean the mission to control price increases is over, giving his first indication since taking office of the central bank's possible future response.
Three-Hour Testimony Before Congress
In a three-hour testimony before Congress on Tuesday, lawmakers questioned Warsh about how he plans to fulfill repeated promises to restore price stability, following the Fed's failure to meet its two percent inflation target for years.
While the new Fed chief did not directly signal a tightening of monetary policy, he made it clear that options to curb inflation include raising interest rates. "We have the tools to do that," Warsh said, adding that he would ask his colleagues to have a serious discussion about the scope and timing of using monetary policy tools.
Economists said the statement did not indicate an immediate rate hike, but it was the closest Warsh has come to publicly saying he would tighten monetary policy since he took office.
Olu Sonola, chief U.S. economist at Fitch Ratings, said it was the closest Warsh has come to acknowledging that the Fed could raise interest rates in response to persistently high inflation, without explicitly hinting at such an increase.
No-lead policy
Warsh was nominated to the Fed by President Donald Trump, who has been pushing for lower borrowing costs for years. Since taking office in May, he has pledged to eliminate the central bank's forward guidance system.
He and others have criticized the practice for tying officials' hands when economic conditions change suddenly. Warsh has previously declined to discuss any Fed response if inflation does not subside, although some of his own policymakers have openly hinted at a rate hike.
However, not everyone is convinced that the latest statement brings any new developments. Jason Furman, a former senior economist in the Obama administration who is now a professor at Harvard University's Kennedy School of Government, said Warsh was consistent and avoided giving any new clues throughout the testimony. "Anyone who thought they were hearing hints about his future plans was misinterpreting it," Furman said.
Market Impact
Traders reportedly reduced bets on a July interest rate hike after inflation data released earlier in the day showed consumer prices fell in June for the first time in six years. The decline came amid a temporary ceasefire in the US-Iran war, which has since flared up again.
If such uncertainty persists, markets tend to be more cautious about making any long-term bets. Some seem to think Warsh has yet to make a final decision on the exact direction of monetary policy, meaning that market sentiment is likely to fluctuate until there are clearer clues. Market Strategy
For the Ringgit, this remaining ambiguity is neither entirely good nor entirely bad news. As long as the Fed itself has not made a decision on its policy direction, the US Dollar is likely to continue to move based on every statement from Fed officials, and this will also have a volatile impact on regional currencies including the Ringgit.
Key Takeaways
Kevin Warsh gave his first signal since being appointed as Fed Chairman that raising interest rates is still an option to curb inflation.
Warsh stressed that the Fed has the tools to control inflation, but did not confirm when or to what extent they will be used.
Analysts such as Jason Furman believe that Warsh is still consistent with his cautious stance, and has not made a final decision.
June CPI data showed the first decline in six years, causing traders to reduce bets on a July interest rate hike.
Continued uncertainty about the Fed's policy has the potential to trigger volatility in market sentiment, including the impact on the Ringgit.
As long as Warsh continues to refuse to provide a clear indication, the market is expected to continue to scrutinize every word the Fed official says, as any small signal can now change the direction of investment in a short time.
