This week, Federal Reserve Chairman Kevin Warsh delivers the semi-annual monetary policy report to Congress. Today and tomorrow, he will present the report to the House Financial Services Committee. The hearings begin at 17:00 Moscow time. Traders are closely watching this speech, as markets are increasingly pricing in a key rate hike as early as this month.
Just a few weeks ago, the probability of such a scenario was estimated at less than 10%. However, today, according to OIS swap data, markets see about a 50% chance of a quarter-point tightening. The yield on two-year U.S. Treasury notes, which is sensitive to expectations for the Fed's rate, is holding firmly above the 4.25% mark.
The sharp reversal in sentiment came after recent statements by Fed Governor Christopher Waller. Previously considered one of the main "doves" at the agency, last week he indicated that if core inflation proves high again, the regulator should consider raising rates in the near future.
The Consumer Price Index for June, set to be released on Tuesday, is expected to show a slowdown in headline inflation to around 3.8% from 4.2% in May—primarily due to lower fuel prices. However, core inflation, which excludes food and energy, will decline only slightly—from 2.9% to 2.8%. This level still exceeds the Fed's 2% target, and it is the persistence of the core indicator that continues to pressure markets.
Warsh Won't Tip His Hand
Since his appointment in May, Warsh has established himself as a proponent of confidentiality. At a recent central bank symposium in Portugal, he made it clear he has no intention of giving markets premature hints. "I want us to have a good 'family' debate. Once we go into the room and close the door, a real discussion awaits us. I won't tell you much new," he noted.
Thus, the speech itself is unlikely to be a clear signal for a rate hike. More likely, lawmakers will focus on issues of 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 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 citizens' wallets. Owners of credit cards, floating-rate mortgages, and secured loans will have to tighten their belts—debt servicing will become more expensive. At the same time, for depositors and holders of savings accounts, this is an excellent opportunity to grow capital, as commercial banks will quickly raise deposit yields in line with the Fed.
Expert opinion: Markets are clearly overestimating the likelihood of a July hike. Warsh consistently avoids hawkish signals, and core inflation, while slow, is declining. I believe the Fed will pause to assess the effect of previous hikes, but a surprise on July 29 truly cannot be ruled out—expectations are changing too quickly.