Federal Reserve Chairman Kevin Warsh gave his first congressional testimony since taking office this week, and the timing was truly significant, coinciding with the release of June's CPI data.

The figures were better than expected, with consumer prices falling 0.4 percent from May to June, marking the first monthly decline in six years, and annual inflation dropping from 4.2 percent to 3.5 percent. Core inflation also fell to 2.6 percent annually, still above the Fed's 2 percent target but at a slower pace than anticipated. Despite this data, Warsh avoided a clear victory declaration, stating that "members of our committee have no tolerance for persistently high inflation," adding that if policy is implemented correctly, the inflation spikes of the last five years will be a thing of the past.

Unlike his predecessors, Warsh gave no directional signals regarding the interest rate path, continuing his strategy of phasing out forward guidance. He also did not offer his own economic projections. Other Fed officials attempted to fill this void, with Governor Christopher Waller saying that new hot inflation data could necessitate a rate hike in the near term, while New York Fed President John Williams indicated that a rate hike could be avoided if core inflation remains at its current pace. With roughly half of the nineteen policymakers forecasting rate hikes by the end of the year, the other half favoring holding rates steady or cutting them, the committee is effectively divided.

The oil crisis, which erupted just before this statement, further complicated the picture. On Monday, Trump announced the reinstatement of a naval blockade against Iran, demanding a 20% "reimbursement" on all cargo, in return for which the US would guarantee the strait as the "Guardian of the Strait of Hormuz." This announcement led to a 9.6% rise in Brent crude to $83.30, the largest daily gain since May 2020, while WTI also rose 9.4% to $78.14. The International Maritime Organization has explicitly rejected the legal basis for such a transit fee, and the U.S. Treasury Department has announced that any party paying for transit to Iran would be considered a violation of sanctions. Trump abandoned the 20% fee demand on Tuesday, saying Gulf states would instead invest in the U.S., but the blockade effectively continued, and the U.S. continued bombing Iran for three consecutive nights. Ship traffic in the strait has fallen by more than fifty percent compared to the previous week.

Warsh has already demonstrated a major institutional transformation in the first six weeks of his term, including the five task forces he announced last week, the reduction of his communications policy, and the lack of a dot plot. In his testimony, he reiterated that he would gradually share the findings of these task forces by the end of the year. He also took a clear stance on political independence, responding to a Democratic congressman's question about pressure by saying, "I will abide by the law and the data, we will follow our best assessment."

For those following Fed policy and oil-related risk assets through Gate, the key point is that the positive inflation picture in June risks reversing in July due to renewed tensions with Iran and the sharp jump in oil prices. Warsh will testify before the Senate Banking Committee for the second time today, and senators are expected to put more pressure on him regarding both interest rate direction and independence from the White House. The next FOMC meeting is on July 28-29, and since there is no forward guidance, any new oil and inflation data released until then will carry much more weight than usual in shaping market expectations.

#WarshReaffirms2PercentInflationTarget