Federal Reserve Chair Kevin Warsh testified before the House Financial Services Committee that the recent surge in inflation over the past five years will soon end, provided monetary policy is appropriately adjusted. This was his first semiannual monetary policy testimony to Congress since assuming office approximately five weeks ago.
Inflation remains above target.
Wash told the lawmakers that recent consumer prices saw the largest monthly decline since 2020, but current inflation levels remain significantly above the Fed’s 2% target. He stated that inflation is not an accident but a policy outcome, and the Fed’s top priority is to adjust monetary policy as closely as possible to the appropriate level.
He further stated that if policy direction is correct, the inflation uptick over the past five years will become a thing of the past. This was his clearest inflation comment to date during the hearing.
Deny that employment and inflation can only be chosen one or the other.
In his testimony, Wash also challenged the long-standing belief in a trade-off between employment and inflation, stating that he does not agree with the need to make a "cruel choice" between the two.
According to him, strong growth, low inflation, and solid employment can coexist if policies are properly implemented. This statement reflects his effort to define the Fed’s current policy goals in a more positive light.
AI investment has become an economic highlight.
Regarding the current economic situation, Wash noted that U.S. household consumption has been modest, manufacturing output has continued to rise this year, but the housing market remains weaker than the broader economic expansion.
He specifically noted that business investment is the most prominent component of the current economy, with equipment spending rising approximately 8% over the year ending in the first quarter, primarily driven by data center construction and AI-related demand. High-tech investment increased nearly 25% on a four-quarter basis.
- Equipment expenses increased by approximately 8% year-over-year.
- High-tech investment increased by nearly 25% in the fourth quarter.
- The housing market has underperformed compared to the overall economy.
The Middle East situation remains a source of price risk.
This hearing comes as developments involving the United States, Israel, and Iran continue to impact energy markets. Wash stated that the Federal Reserve is monitoring how the AI investment boom is transmitting to inflation and the labor market, while also remaining alert to new price shocks arising from geopolitical tensions.
The June CPI data showed inflation easing as regional tensions temporarily eased, but the overall reading has not yet returned to the Federal Reserve’s target range. Waugh will also appear before the Senate Banking Committee on Wednesday for his second congressional hearing.