Original author: Li Dan

Original source: Wall Street Insights

Federal Reserve Chairman Warsh's "debut" at the Congressional Monetary Policy Hearing presented his "Federal Reserve New Deal Declaration". He did not give the market the most concerned signal of interest rate cuts or interest rate increases. Instead, he repeatedly emphasized restoring price stability, maintaining the independence of the Federal Reserve, and promised that future balance sheet adjustments would be fully communicated in advance.

Journalist Nick Timiraos, known as the "New Fed News Agency," believes that Warsh deliberately avoided making any hints about the future path of interest rates that day, and instead focused the hearing on reiterating the Fed's long-term goal of controlling inflation.

Just before the hearing began, the June CPI announced by the United States was lower than market expectations, which once prompted the market to further bet that the Federal Reserve would loosen policy faster. However, Warsh downplayed the importance of this data and said he did not believe that the inflation task has been completed.

Timiraos pointed out that Warsh did not use this inflation data to release any future policy tendencies, nor did he reveal the interest rate path at or after the July interest rate meeting. Instead, he insisted on emphasizing that the Fed has two policy tools, interest rates and balance sheets, and will decide how to use these tools based on economic data in the future to achieve price stability goals.

Bloomberg believes that this hearing, which lasted for several hours, actually outlined the policy framework of the "New Federal Reserve": insisting on the independence of monetary policy, adhering to the 2% inflation target, not accepting the idea that employment and inflation can only choose one or the other, while leaving room for future balance sheet reforms and central bank governance reforms.

Affected by Warsh's hawkish speech, U.S. bond yields gave up part of the decline after the CPI was announced during the Warsh hearing, and the U.S. dollar index narrowed about half of the decline after the CPI was released.

Five Signals: Warsh’s first congressional hearing outlines the policy framework of the “New Fed”

Reaffirming “zero tolerance” for continued high inflation and asserting that a drop in CPI is not enough to declare victory in reducing inflation

Wash emphasized at the hearing that the Fed has "zero tolerance" for continued high inflation. He said that the Federal Reserve has failed to achieve its 2% inflation target for many years, so restoring price stability remains the most important policy task at present.

Facing the June CPI data released that day, which was significantly lower than market expectations, Warsh said: "Some people may say that (inflation) mission accomplished (Mission accomplished), I don't think so."

Timiraos believes that Warsh repeatedly reiterated the long-term inflation target that day without adjusting his policy stance due to improvement in single-month data, highlighting his desire to prevent the market from interpreting a single inflation data as a signal that monetary policy is about to shift.

No interest rate path was disclosed, emphasizing that future actions will still be based on data

Wash has always maintained restraint regarding the next step in interest rates that the market is most concerned about.

Timiraos pointed out that Warsh did not hint at the policy direction of the next few FOMC meetings of the Federal Reserve Monetary Policy Committee, nor did he answer the market's questions about when interest rates may be adjusted. Instead, he emphasized that the Fed has two tools, interest rate policy and balance sheet policy, and will judge whether and how to use these tools based on future economic data.

However, Warsh also revealed that he and his FOMC colleagues will discuss "whether and when policy tools need to be used" in the coming period, and described that there may be a "intense discussion within the family (family fight)" at that time.

Bloomberg believes that this statement means that although Warsh did not give clear policy guidance, his overall rhetoric is still hawkish, showing that he is unwilling to easily release loose signals before confirming that inflation continues to return to the target.

Employment and inflation are not a "cruel choice" between two options

In response to questions from lawmakers about the Fed's dual mission, Warsh denied that there was a so-called "cruel choice."

He said that as long as price stability is restored, the U.S. economy can continue to grow and companies can continue to expand hiring. Therefore, controlling inflation and achieving full employment do not conflict with each other, but reinforce each other.

This statement further strengthens its policy philosophy that price stability itself is the basis for long-term employment growth and economic prosperity.

The balance sheet reform will be announced in advance and will not suddenly impact the market

Balance sheet reform has been an important reform issue since Warsh took office.

However, at this hearing, he expressed his unwillingness to predict the conclusions of the ongoing balance sheet reform working group.

At the same time, he promised that if the balance sheet policy is adjusted in the future, the Fed will fully communicate to the market in advance to ensure that investors have sufficient expectations and will not take sudden actions.

Wash once again emphasized that the Fed's balance sheet should serve monetary policy rather than assume fiscal policy functions.

Reuters believes that this statement will help alleviate market concerns that the new round of balance sheet reduction reform may be advanced too quickly, and also means that the Federal Reserve will pay more attention to policy communication and market expectation management in the future.

Adhere to the independence of monetary policy and receive positive responses from some members of both parties

Facing questions from lawmakers, Warsh once again emphasized that the Federal Reserve will remain independent in formulating monetary policy and promised that the setting of interest rates will not be influenced by political factors.

Bloomberg reported that although Warsh received little support from the Democratic Party during the Senate confirmation process, at this hearing, many Democratic congressmen still gave positive comments on his stance of emphasizing the independence of the central bank.

Senior congressional reporter Steve Dennis believes that in the context of Trump's continued public pressure on the Federal Reserve to cut interest rates, some Democratic congressmen have chosen to publicly support Warsh's position of maintaining the independence of the central bank, which also reflects the subtle changes between the two parties on this issue.

Wash Hearing Strengthens Communication Framework for Data-Determined Policy

What does the market think of the Wash hearings? Overall, Warsh's remarks did not change the short-term interest rate outlook, but strengthened the new communication framework of "data determines policy."

Timiraos believes that the biggest feature of Warsh’s hearing is not to release new policy signals, but to deliberately not release any signals about the path of interest rates.

Faced with a lower-than-expected CPI report, Warsh did not discuss whether to cut interest rates next, nor did he provide any forward guidance. Instead, he always focused on restoring price stability, the Fed's independence and policy tools, continuing his communication style of avoiding commitments to a single data or a single meeting since he took office.

Bloomberg believes that the hearing further outlines the policy tone of the Federal Reserve under Warsh: continuing to prioritize price stability, while promoting balance sheet and central bank governance reforms, and managing market expectations through more transparent communication.

For investors, this means that future Fed policy will still be highly dependent on data performance, rather than the preset interest rate path, and the market will also pay more attention to how Warsh implements this concept into the actual decision-making of the FOMC in the next few months