Warsh's Report to Congress: Fed on the Verge of a Rate Hike — Markets Price in 50% Probability
Federal Reserve Chairman Kevin Warsh delivers a semi-annual monetary policy report to the U.S. Congress. Hearings before the House Financial Services Committee began today and will last two days. This is the new Fed chair's first appearance before lawmakers, and markets expect key signals from him regarding the future course.
According to OIS (Overnight Index Swap) data, traders estimate a 50% probability of a 25-basis-point rate hike as early as July. Just a few weeks ago, this scenario seemed unlikely, with odds below 10%. This sharp reversal in expectations followed a statement by Fed Board member Christopher Waller, previously considered one of the committee's main "doves." Waller unexpectedly stated that if core inflation shows significant growth again, the regulator should consider raising rates in the near future.
Inflation is slowing, but the problem persists
The release of fresh Consumer Price Index (CPI) data for June coincides with the start of the hearings. Headline inflation is expected to slow to 3.8% from 4.2% in May, mainly due to lower fuel prices. However, core inflation, which excludes food and energy, will decline only slightly from 2.9% to 2.8%. This indicator remains above the Fed's 2% target, creating pressure on the regulator.
It is the persistence of core inflation that is prompting investors to revise their forecasts. Stocks of rate-sensitive companies continue to react to CPI-related risks. Nevertheless, Warsh himself is unlikely to reveal his hand. At the central bank symposium in Portugal, he made it clear he does not intend to give markets hints: "I want us to have a good family debate. Once we go into the room and close the door, we'll have a real discussion. I won't tell you much new yet."
What a rate hike means for ordinary families
Any change in Fed policy directly impacts citizens' wallets. When rates rise:
- Credit cards — interest on debt will increase, raising debt servicing costs.
- Adjustable-rate mortgages — monthly payments will rise, increasing the financial burden on borrowers.
- Home equity loans — debt servicing costs will go up.
- Savings accounts and deposits — banks will raise yields for clients, offering savers guaranteed benefits.
For those with large debts, tough times are ahead. However, holders of savings accounts will get an excellent opportunity to grow their capital, as commercial banks will immediately start raising deposit yields in line with the Fed.
My expert conclusion: The market is overestimating Warsh's "hawkish" stance. Given the uncertainty surrounding trade tariffs, oil supply disruptions, and AI's impact on domestic prices, the Fed chair is likely to maintain a neutral position. We will only know the final verdict at the closed-door vote on July 29.