Federal Reserve Chairman Kevin Warsh is testifying before Congress today and tomorrow with a semi-annual monetary policy report. His appearance before the House of Representatives is scheduled for July 14 at 10:00 AM Eastern Time (5:00 PM Moscow Time). Markets are pricing in a high probability that this week will be decisive for confirming expectations: a rate hike could occur within the next two weeks.
Warsh's testimony coincides with the release of fresh inflation data and the start of the banking earnings season, making this week one of the most significant for anyone with a mortgage, savings, or credit card debt.
Why the odds of a rate hike have surged
Traders are currently pricing in roughly a 50% probability of a quarter-point rate hike this month. Just a few weeks ago, this scenario was estimated at less than 10%. The yield on two-year U.S. Treasury notes, which reflects expectations for the Fed's rate, remains above 4.25%.
The shift in expectations occurred following statements by Fed Board member Christopher Waller. Markets had long considered him an enthusiast for policy easing, but Waller recently stated that if the next batch of core inflation data again shows a large increase, the regulator should consider a rate hike in the near term.
The Consumer Price Index for June, to be released on Tuesday, is expected to show inflation easing to around 3.8% from 4.2% in May. The main reason is a decline in fuel prices. However, core inflation, which excludes food and energy, is likely to decline only slightly, to around 2.8% from 2.9%. This level still remains above the Fed's 2% target.
Warsh is unlikely to tip his hand
Since taking office as Fed Chairman in May, Warsh has already gained a reputation for favoring secrecy. At the central bank symposium in Portugal in July, he again made it clear that he does not intend to give the market any advance hints.
"I want us to have a good 'family' debate. Once we enter the room and close the door, a real discussion awaits us. I don't have much new to tell you yet," noted Kevin Warsh.
It appears that the testimony itself is unlikely to provide a clear signal for a rate hike. Lawmakers will likely focus on the Federal Reserve's independence from the Trump administration. Additionally, legislators will probably address the impact of artificial intelligence technologies on domestic prices. Furthermore, Warsh will have to comment on the consequences of new trade tariffs and disruptions in oil supplies from the Middle East.
Nevertheless, financiers will only deliver their final verdict at the closed-door vote on July 29.
What a rate hike means for ordinary families
Any change in the course of the U.S. central bank inevitably hits the wallets of ordinary citizens. People with large debts will face difficulties in an environment of expensive loan servicing. However, for holders of savings accounts, this is an excellent opportunity to grow capital, as commercial banks will immediately begin raising deposit yields in line with the Fed.
My analysis: Markets are clearly overestimating the probability of a rate hike in July. Warsh is known for his caution, and I believe he will prefer to wait for more convincing inflation data to avoid risking market stability. However, if core CPI does show sustained growth, the scenario of a rate hike this month will become dominant, putting significant pressure on risk assets, including cryptocurrencies.