Warsh flags easing inflation risks as USDJPY nears 200 level

Federal Reserve Chair Kevin Warsh acknowledged easing inflation pressures Wednesday but reaffirmed the central bank's commitment to its 2 percent target, declining to signal whether the Fed will raise rates at its July meeting.

Warsh, speaking at the European Central Bank's annual forum in Sintra, Portugal, said inflation risks "have come down" over recent weeks, though he argued prices remain "too high." The remarks marked his first public appearance since the Fed's June 16-17 meeting, where policymakers held the federal funds rate at 3.5 percent to 3.75 percent for a seventh consecutive decision.

"If there were people in households, the business sector, the financial markets, who thought that this central bank was gonna be comfortable with an inflation objective above 2 percent, I guess they'd be disappointed," Warsh said during a panel alongside ECB President Christine Lagarde, Bank of England Governor Andrew Bailey and Bank of Canada Governor Tiff Macklem. "We're gonna deliver price stability in the US."

The comments represent a notable shift from last year, when Warsh criticized central bankers for not cutting rates fast enough after three quarter-point reductions. The economic backdrop has since changed dramatically: the war in Iran pushed inflation above 4 percent for the first time in three years, with the consumer price index reaching 4.2 percent in May, while the labor market remained resilient with unemployment at 4.3 percent.

When pressed on whether inflation fears warrant a rate increase, Warsh demurred. "I'm not going to make a judgment now," he said. "There's a lot of late breaking news on a series of these things. When we get into that room and shut the door, we're going to have a good debate."

Traders responded by pricing a 30 percent probability of a quarter-point hike at the July 29 FOMC meeting, up from just 6 percent a month ago, according to CME FedWatch data. Markets still lean toward a hold, though the odds have shifted sharply as inflation data has come in above expectations. The Fed's dot plot from June showed nine of 19 officials — excluding Warsh, who declined to participate — saw at least one rate increase by year-end, up from just one member in March.

Cross-Asset Transmission

The dollar held near multi-decade highs against the yen, with USDJPY approaching the 200 level for the first time since the 1990s, as the divergence between Fed and Bank of Japan policy paths widened. The pair's trajectory has fueled speculation that Japanese authorities may intervene to support the yen, a prospect that would trigger sharp short-term volatility across currency markets and carry trades.

The Dow Jones Industrial Average rose 0.3 percent, or about 150 points, while the S&P 500 added 0.1 percent and the Nasdaq slipped 0.2 percent. Gold ticked higher after suffering its worst quarter in 13 years in the three months through June, as investors dumped the safe-haven asset on expectations the Fed could raise rates. Citigroup slashed its 12-month forecasts for bitcoin and ether, citing weak investor appetite as massive AI initial public offerings have sucked liquidity from the market.

The last time the Fed faced a comparable inflation trajectory was in 2022-2023, when the central bank delivered 525 basis points of tightening over 16 months to bring the fed funds rate to a 22-year high. The S&P 500 fell 19 percent over that period before rebounding as inflation moderated, while the dollar index surged to multi-decade highs.

Forward Guidance and Independence

Warsh used the appearance to reinforce his opposition to forward guidance, the practice of signaling future policy moves that his predecessor Jerome Powell employed extensively. "I hear this as if people don't understand. I think they understand quite well," he said when asked whether a less outspoken Fed could leave markets in the dark.

He also pushed back against President Donald Trump's pressure campaign on the central bank, which included threats to fire Powell and a recent Supreme Court case over the firing of Fed Governor Lisa Cook. "We've been an independent central bank for a very long time," Warsh said. "We're going to be an independent central bank at this moment, and you're going to see no changes on that."

Warsh said leaders of the five task forces he announced last month to study Fed operations, including one focused on communication strategy, will be announced next week. He said the Fed's dot plot projections will continue for "a short time at the very least" but that one of the task forces will revisit the practice.

The next major catalyst for the dollar and rate expectations is Thursday's June nonfarm payrolls report, where economists expect 115,000 jobs added, down from 172,000 in May. A strong reading could reinforce the case for a July hike, while a miss would support the hold camp. ADP data released Wednesday showed private payrolls grew by 98,000 in June, below the 110,000 consensus estimate.

This article is for informational purposes only and does not constitute investment advice.