Warsh Report to Congress: Fed Rate Could Be Raised as Early as July — Cryptalist Analysis
Federal Reserve Chairman Kevin Warsh begins a two-day testimony before Congress. Today and tomorrow, he will present the semi-annual monetary policy report to the House Financial Services Committee. The hearings start at 10:00 AM Eastern Time (5:00 PM Moscow time).
Markets are pricing in a 25 basis point rate hike at the July 29 meeting. And this is not just speculation: traders estimate the chances at roughly 50%. Just a few weeks ago, this scenario seemed unlikely—less than 10%.
Why have expectations changed so sharply?
The key catalyst was statements by Fed Board member Christopher Waller. Markets had long considered him a "dove"—a supporter of loose policy. However, last week, Waller made it clear: if core inflation shows another high increase, the regulator should consider a rate hike in the near future.
June Consumer Price Index (CPI) data, due out Tuesday, is expected at around 3.8% (versus 4.2% in May). The main driver of the decline is falling fuel prices. However, core inflation (Core CPI), excluding food and energy, is likely to fall only slightly—from 2.9% to 2.8%. This level is still above the Fed's 2% target.
It is the persistence of core inflation that continues to pressure rate-sensitive assets, including technology stocks and cryptocurrencies.
Warsh: Don't Expect Surprises
Since his appointment in May, Warsh has established himself as a proponent of secrecy. At the central bank symposium in Portugal, he indicated he would not 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 won't tell you much new," he said.
Thus, the testimony itself is unlikely to provide a clear signal for a hike. Congressmen will likely focus on the Fed's independence from the Trump administration, the impact of AI technology on domestic prices, as well as the consequences of new trade tariffs and disruptions in oil supplies from the Middle East.
Financiers will deliver their final verdict only at the closed-door vote on July 29.
How Will a Rate Hike Impact Wallets?
Any change in the U.S. central bank's policy inevitably hits ordinary citizens' wallets. Here is a brief breakdown of the consequences:
- Credit Cards: Interest on debt will increase. Debt servicing costs will rise.
- Adjustable-Rate Mortgages: Monthly payments will become higher. The financial burden on borrowers will intensify.
- Home Equity Loans: The cost of servicing debt will increase. Payments will become more burdensome.
- Savings Accounts: Banks will raise yields for customers. Savers will receive guaranteed benefits.
- Deposits (CDs): Interest rates on new deposits will rise. Returns on savings will increase.
Hard times are coming for people with large debts. However, for owners of savings accounts, this is an excellent opportunity to grow capital, as commercial banks will immediately start raising deposit yields following the Fed.
My view: Markets are already pricing in a hike, but Warsh will likely maintain a neutral tone to avoid preempting his colleagues' decision. The key factor will be the June CPI: if core inflation comes in above 2.9%, the probability of a rate hike will sharply increase, putting short-term pressure on risky assets, including cryptocurrencies. However, for long-term investors, this could create interesting entry points.