Warsh's Semi-Annual Report: Is the Fed Preparing Markets for a Rate Hike in July?
Federal Reserve Chairman Kevin Warsh is testifying before Congress today and tomorrow with the semi-annual monetary policy report. His House hearing, scheduled for July 14, coincides with the release of fresh inflation data and the start of the bank earnings season. Markets are pricing in roughly a 50% probability of a rate hike as early as this month — a sharp jump from less than 10% just a few weeks ago.
The main catalyst for this reversal is recent statements by Fed Board member Christopher Waller, long considered a "dove." Waller directly indicated that if core inflation shows significant growth again, the regulator should consider raising rates in the near term. The Consumer Price Index for June, released Tuesday, is likely to slow to ~3.8% from 4.2% in May — mainly due to lower fuel prices. However, core CPI, which excludes food and energy, will decline only slightly to 2.8% from 2.9%.
This level is still above the Fed's 2% target. It is the persistence of core inflation that is forcing markets to reassess their expectations. The yield on two-year U.S. Treasury notes, which is sensitive to rate expectations, remains above 4.25%.
What to expect from Warsh's testimony?
Warsh himself is known as a proponent of secrecy. At the central bank symposium in Portugal, he made it clear he does not intend to give markets any hints in advance, promising a "good family argument" behind closed doors. Therefore, his testimony is unlikely to provide a clear signal for a rate hike. Instead, lawmakers will likely focus on the Fed's independence from the Trump administration, as well as the impact of AI technology on domestic prices. Additionally, Warsh will have to comment on 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.
Cryptalist Analysis
Markets appear to be overestimating Warsh's "hawkish" stance. Current inflation, while above target, is no longer critical. A 25 bps rate hike in July is more of a gesture to strengthen confidence in the Fed's mandate, rather than the start of a new tightening cycle. For the crypto market, this means temporary volatility, but not a trend reversal: the dollar may gain short-term support, putting pressure on bitcoin, but fundamentally, rates remain at a prohibitive level for risk assets.